Credit Policy

A credit policy is the written framework that governs a company's extension of trade credit. A complete policy covers the mission and risk appetite (aggressive, moderate, conservative), required information by credit-line size, decision criteria and scoring, approval authority levels, terms offered, limit-setting methodology, review frequency, hold and release rules, collection escalation timelines, and write-off authority. Its purpose is consistency: two similar customers should get similar decisions regardless of which analyst handles them or which salesperson is shouting.

The policy is also the credit department's charter in the perennial tension with sales. When the rules for holds, releases, and exceptions are written and management-approved, disputes become about whether the rule was applied, not whether the analyst is being difficult. Exception paths should exist, but as documented decisions with named approvers, so the exception trail itself becomes risk data.

Policies fail in two symmetrical ways. A policy that is too rigid gets ignored, and then no policy is actually in force. A policy that is never updated encodes a risk appetite from a different economy; the document should be reviewed at least annually and re-tuned when loss experience, interest rates, or the company's own liquidity changes. The test of a good policy is not elegance but whether a new analyst can make a defensible decision from it on day one.