In: Finance
What are the general elements of credit policies? Use a real example to explain it.
CREDIT POLICY
A credit policy is a very needful document for the business.Most of the customers need credit system in the business then only the business will go smoothly. So credit policy is a must followed term for the business. It is much needed when the business is credit heavy construction industry. Actually credit policy consist of guidelines which consist of the credit terms and how the policy should be. It consist determination of credit extension and policy, the limit of credit outstanding, and the procedures to use the credit related terms etc. Simply a firm's credit policy is the set of principles on the basis of which it determines who it will lend money to or gives credit (the ability to pay for goods or services at a later date is known as credit).A good credit policy is as important to a company as its sales and customers. A better credit policy allows for all other areas of the company to operate in a more wide manner because it opens up new avenues of revenue which were not there prior to credit being allowed. This is how the credit policy system works.
For example
The company will extend credit to customers if they meet its threshold criteria for the granting of credit. The basic form of credit is a maximum credit of $10,000, with no security interest. The maximum credit can be expanded with the approval of the credit manager. In situations where a customer's ability to repay is in question, a personal, corporate, or bank guarantee may be required. All terms are net 30 days, with no exceptions if a longer payment term is requested.This is the method which will follow in credit policy.
then the company will assess and review the credit application because they want to keep their financial ratios in a proper manner. So that the proper analysis is required and and it is very much needed to check the trust worthiness of the other party. For this purpose the committee will regularly check the transactions of the party very carefully. They need to identify the repayment history of the other party then only they can give credits to others. This is how the system works.
ThankYou....