A company’s credit policy is simply its guidelines for when customers should pay for goods and/or services. It sets out the financial policy by which a business decides who it will extend credit to and for how much. In the Louisiana construction industry, where contractors, material suppliers and equipment lessors frequently extend credit, the right credit policy can prove vital to mitigating risk and ensuring payment.
Understanding Louisiana Credit Policies
You should always start by clearly understanding what your credit policy is used for and the key elements it must contain. A credit policy is a set of written guidelines that:
- Are used to determine which customers may receive credit for goods and/or services provided;
- Specify the limits and terms of payment for credit transactions; and
- List the steps that will be taken in the case of nonpayment.
In drafting a credit policy, there are some key points to consider. First, you should decide whether you want to create a credit policy from scratch or “recycle” and adjust your current credit management policies and procedures into a formal credit policy. If the procedures you have already been using work for you, then you will likely just want to reformulate them into your official written credit guidelines. If your current procedures aren’t working for you, however, you may need to brainstorm and strategize. In either case, we recommend you speak with an attorney who can help you draft the credit policy that is right for you.
Also, keep in mind that a stricter credit policy isn’t always better. In the construction world, the easier it is for a customer to obtain credit from the contractor, the more goods/services customers are able to purchase – leading to higher revenue for the contractor. Obviously too lax of a credit policy isn’t helpful either. You should create a credit policy that strikes the right balance between sales and financial security. Sales and credit departments never get along, the key is to strike a healthy balance between the two.
At Smiley Law, we recommend our clients look through their past credit-lending policies to see what was/wasn’t beneficial for them. You may also want speak to others in your industry and jurisdiction to see what they instituted. Then, once you figured out what works best, write out clear, written guidelines that specify these conditions.
Here at Smiley Law, we are always ready to take your credit policy questions. Contact us today!