What is a credit policy?

Answer 1

An organization's credit policy, regardless of type of business, details the rules associated with granting customers and other stakeholders credit.

Financial organizations, government entities and medium/large corporations generally maintain credit policies that are very detailed and specific to particular situations. For some companies, credit policy is limited to invoice terms.

The credit policy rules usually cover the following specific attributes of the party that is to receive credit:

* Ability to pay back (e.g., income, asset sales, etc.)

* Historical use of credit (e.g., a credit rating)

* Collateral (e.g., can property be used as collateral to get the credit)

* Amount (e.g., there may be limits on how much a particular party may borrow)

* Duration (e.g., there may be limits on how long a particular party may borrow for)

* Relationship (e.g., how long and with whom has the party been affiliated with the company)

* Type (e.g., revolving vs. fixed credit)

Also, credit policy will typically have rules concerning the loan/credit while extended including the following:

* Termination/credit call (i.e., the circumstances that allow the granter to cancel the credit and expect immediate repayment)

* Duration (i.e., how long credit may be extended for)

* Pricing (i.e., what to charge the party taking credit for the use of the credit)

* Frequency of payments (i.e., when and how often must the credit/loan be paid back)

* Relationship (i.e., if the relationship changes, the credit already extended may need terms changes as well)