The short answer: a customer credit policy is a short written document saying who approves new credit, how limits and terms are set, what information is collected first, when accounts are reviewed, and how exceptions are recorded. It exists so trade-credit decisions are made the same way whichever staff member happens to make them.
Every business that invoices before it is paid already has a credit policy — it is just usually unwritten, which means it is applied by instinct, varies by customer, and changes when the person who carries it in their head is busy. Writing yours down does not require a formal department. One to three pages, followed consistently, is a policy.
The policy outline
Use these ten headings in order. Short answers under each are enough; the value is in having them.
- Purpose and scope. What the policy covers: trade credit extended to business customers on invoice terms. State that it applies to new and existing customers alike.
- Definitions. Credit limit (the maximum gross exposure you allow), exposure (open invoices plus orders not yet delivered), past due (measured consistently — see the note on conventions below).
- Information required before credit is granted. The entity you are contracting with, billing details, requested limit and terms, references you choose to obtain, and any internal checks your business relies on.
- Approval authority. Who approves which band of exposure — the table below — and who approves exceptions.
- Standard terms. The default interval for new customers and how a different interval is justified. Keep these consistent with the terms stated on your invoices.
- Limit monitoring. Where limits are checked: at order acceptance or before delivery, whichever your business controls.
- Over-limit and hold rules. What happens when exposure exceeds the limit: pause new orders, request partial payment, or route to the approver for a documented decision.
- Review intervals. Scheduled reviews and event-driven reviews (below).
- Exceptions. Who may grant one, what must be recorded, and when the exception expires.
- Escalation and policy review. What triggers collections action, and how often the policy itself is revisited — annually is a common working choice for a small business, adjusted to your own cycle.
Approval authority: an example matrix
Approval should follow exposure, so bigger commitments get a more senior decision. This is an illustrative structure only (hypothetical example — all thresholds are fictional placeholders for you to set):
| Requested exposure | Approver | Information required | Turnaround expectation |
|---|---|---|---|
| Small (up to a threshold you set) | Admin or sales admin, within standard terms | Entity details, billing contact, requested terms | Same-day paperwork check |
| Medium | Owner or finance lead | As above, plus one or more trade references | Before the first order ships |
| Large or outside standard terms | Owner or director, recorded in writing | Full information pack and stated rationale | Formal decision with a note on file |
| Any exception to this policy | Named approver only | Reason, amount, expiry date | Logged in the exceptions register |
The point of the matrix is not the bands; it is that nobody has to guess whether they are allowed to say yes.
What to ask for before granting credit
Minimum viable information for a new commercial customer: the correct legal entity and billing name, an accounts-payable contact, the terms requested, and whatever reference or verification your business has decided to rely on. Ask the same core questions of every applicant so decisions are comparable.
Setting limits and terms
A limit is a decision about how much of your own cash flow you are willing to place with one customer. Three inputs make it defensible: what the customer has demonstrated they can pay (their history with you, once it exists), what their payment interval is, and what your business can absorb without strain if the balance went unpaid for a while. You are not forecasting their solvency — you are capping your exposure to a number you could live with.
Terms: start new customers on your standard interval unless there is a written reason not to. Longer terms can be a legitimate commercial concession, but they should be a decision someone approved, not something drifts in through a sales conversation. Record the reason alongside the approval.
Keep a single aging convention when you measure exposure, or comparisons between reviews will be meaningless — the mechanics are explained in how to read an accounts receivable aging report.
Review intervals
Two kinds of review belong in the policy:
Scheduled reviews
A calendar cadence — monthly for the exposure list of a small business, quarterly at minimum for established accounts — where you look at each customer's limit against their current exposure and payment behavior. Most of this is quick: nothing has changed, no action, note the date.
Event-driven reviews
Triggered immediately, regardless of the calendar:
- A payment misses its due date, or a promise to pay is broken
- A request arrives that exceeds the customer's limit
- Order size jumps well beyond that customer's pattern
- A dispute arises and remains unresolved past your review point
- A customer asks for longer terms or a higher limit
- Information reaches you suggesting the customer's circumstances have changed
Each event ends in one of three documented outcomes: continue unchanged, change terms or limit, or restrict until payment. The log is the point — an undocumented decision cannot be reviewed or defended later.
Exceptions: allow them, but make them visible
Real businesses grant exceptions constantly — a first big order, a strategic account, a customer whose payment cycle runs long by nature. The policy should expect this rather than pretend otherwise. An exception has four fields: who approved it, why, the amount and period it covers, and when it expires. Review the exceptions register at each scheduled review; if the same customer appears three times, that is not an exception any more — it is a signal to change the standard decision for that account.
Enforcing it
The uncomfortable part is that a policy you enforce only sometimes teaches everyone to ignore it — including your own team. Two practical supports make enforcement easier:
- Make the check automatic. Exposure verified at order acceptance means nobody has to remember.
- Give sales a route. A documented exception path means an over-limit request becomes a five-minute approval instead of a confrontation or a silent override.
Hold decisions should be communicated as a process outcome, not a judgment about the customer: the account is paused pending payment of a stated amount, and it resumes when that payment is applied.
Where the policy meets collections
A credit policy is the first half of receivables; the second half is what happens when an account goes past due anyway. Your escalation triggers — the second missed promise, the silence across channels — should be named in the policy so everyone knows where routine follow-up ends. Those triggers feed directly into your accounts receivable collection process and, ultimately, into the decision about sending an account to collections. Prevention tactics around onboarding and invoicing are in how to prevent late payments from customers.
Common mistakes
- A policy nobody outside finance has read. Sales has to know it exists or it will be bypassed.
- Limits set once and never revisited. Exposure outgrows the original number, and the policy stops binding.
- Undocumented exceptions. The decision happened; nobody can show who made it.
- Different standards for favorite customers. Inconsistent application is what turns a policy into a suggestion.
- Confusing credit approval with collections. Approving credit is a forward-looking decision; collecting is a remedy — keep the two procedures distinct but connected.
Next steps
Draft the ten headings this week with the thresholds you already use in practice, circulate it to anyone who can accept an order, and set your first scheduled review date. Measure results with the aging report rather than instinct, and if you also watch DSO, read how to reduce days sales outstanding without confusing the metric first so the number means what you think it means. For customers who are already past due beyond your internal follow-up, how to collect unpaid invoices covers the next stage of effort. The full picture this policy sits within is in the accounts receivable management guide, and if an account has stalled despite good credit controls, you can submit it for review.