Credit policy can be termed as condemning the framework of the charter of a firm. It demonstrates the selection of the customers about the expression of deals, continuation of the credit, terms regarding the collection. Credit enables the customer to undertake the possession of a good, or service beforehand, and pay to the lender after a specific sum of time which is agreed by both.
Companies usually propose two buying options to the customer. First, on-time cash, and second, credit. If the company has elaborated the credit resources according to the different preferences of the customer, they tend to prefer credit policy as their buying option and pay for the goods later. The time duration and the amount of sum to be paid are decided according to the credit policy. Both, the customer and the vendor agree to this policy. Credit policy may include different terms, and options according to the convenience of the lender, so that he may receive cash payments in the most profitable forms. These policy terms are decided by the lender keeping customer behavior in mind.
The 5 C's of Credit Policy
The factors of the credit policy rely on the 5 C's that are, Character, Collateral, Capacity, Capital, and Conditions.
- Character alludes to the reputation of the dealer for completing its payments. The lender can know about the dealer's payment behavior from other suppliers.
- Collateral ensures the security of the products, and services in case if the payment is not issued by the customer/retailer.
- Capacity is the ability of the dealer to make time-to-time payments, or the complete sum of the worth of goods at a time.
- Capital refers to the number of monetary resources a retailer has under possession.
- Conditions refer to the motive with which a person requires a loan, and particulars regarding the same, such as the amount of loan, time duration, etc.
Functions of a Credit Policy
Credit policy has several benefits that help you enhance your business with precise efforts. The Following are the functions performed by the credit policy,
- It gets you a clearer picture about how you are going to engage new customers in your business, what will be the information required, the amount of credit required, etc.
- It enables the customer to understand your way of business from the start to the end while dealing with a customer.
- Credit policy shed light on the work credit, and the trading to inculcate and perform the necessary tasks together in a business-friendly environment to elaborate the business.
- It creates the risks in stages that need to be undertaken to ensure elaboration in profits and shortening the losses.
- It creates space to develop internal communal relationships where all are aware of their respective fields and know about their work.
- It helps to safeguard against any falsified practices.
- It sets up different levels of risk to be undertaken by different co-workers according to their designations, which in result promising profitable results.
Credit Policy is designed in such a way that it not only benefits the business but also the retailer. The functioning of credit policy can be performed with ease if both parties are aware of all the terms, and conditions, and work accordingly.
