Credit Policy Institutional Affiliation Student’s Name Course Name/Section Instructor’s Name Date Submitted
What are the basic components of credit policy?
Credit policy refers to set principles that a company utilizes in determining who it will give credit. Credit is central to business transactions. Businesses offer credit to clients and procure items on credit. However, at times, customers do not make timely payments causing the companies to end up with uncollected debt, which lowers cash flow. An updated credit policy is advantageous to a company in that; it proactively manages outstanding invoices (Solano, 2013). If a company decides to grant credit to its customers, it must establish procedures for extending and collecting credit. Specifically, the company will have to deal with the following primary components of credit policy.
• Credit Analysis – To determine the creditworthiness of an issuer, credit analysis is done to determine the issuer’s financial status. Credit analysis is beneficial in knowing the capability of a borrower to repay the credit. Credit analysis incorporates an extended variety of trend analysis and financial analysis (Edmister, 1974).
• Terms of Sale – Conditions under which a company sells its services and goods for credit or cash is known as terms of sale. Terms of sale establish the cash discount, type of credit instrument, credit period, and discount period when a company grants credit to any given customer (Edmister, 1974).
• Collection Policy – A collection policy is designed to ease a company’s bad debt exposure. As an account ages, the possibility of a collection reduces rapidly. Alternatively stated, the longer an account remains overdue, the harder it becomes to collect the pending balance (Solano, 2013).
Edmister, R., & Schlarbaum, G. (1974). Credit Policy in Lending Institutions. Journal of Financial and Quantitative Analysis, 9(3), 335-356. doi:10.2307/232986
Martínez?Sola, C., García?Teruel, P. J., & Martínez?Solano, P. (2013). Trade credit policy and firm value. Accounting & Finance, 53(3), 791-808.