The transaction of buying and selling is what drives our economy. As a business stakeholder one principle is to maximize profits and minimize your losses. Losses can come in a vast range of occurrences from inventory damage, not getting your product to market in time, or theft. By factoring losses into your pricing model you can recover some of this loss and still make a profit. Another way the business can influence the minimizing of loss is by having a Credit Policy which defines the company's procedures of extending credit to customers. 

A sound Credit Policy is essential to mitigating losses. The scope and complexity of one's Credit Policy is driven by regulation, industry type, and acceptable business practices. As an example, it could be required to have two years audited financial statements, personal credit report on the principals of the business, a credit report on the business, a lien on the inventory, a lien on the real property, along with Purchase Money Security Interest on the purchase of assets. This may be enough to satisfy some credit managers or underwriters. On the other hand, the policy can be written to require a completed credit agreement identifying the principals of the business and a credit report on the personal guarantee. Both of these policies may met the goal of acceptable losses.

A company's credit policy is not a document you can write once and then put away. As the business environment changes your Credit Policy must be updated to meet the challenges. An example is the use of credit cards as payment. At first glance, why would the form of payment impact your credit policy and others would not have an issue. However, when you dive deeper, how does a credit card payment impact the cash flow of your customer's business? When you are extending 30 day terms to your client and they pay with a credit card, they are receiving an additional 30 days to pay the credit card company. Now the company could be 60 days deeper in cash flow trouble and you would not know. Another issue coming into the credit landscape are companies offering accounts payable automation and offering electronic payment options to their vendors. How this new channel will impact the credit industry is yet to be seen. With these two examples, you can see how credit policies are an ever-evolving document, and why it should be reviewed periodically to ensure that it continues to document to best practices for your company.