In accounting, the term ‘credit policy’ comes into existence whenever an account for receiving the granted debts is established. It should be in our best interest that such receivables are either related to the credit for firms or for the consumers which is called “consumer credit” in the corporate world.
Furthermore, the worldwide accounting standards have tapped on the same term by taking three major components into consideration with a recommendation for financial institutions to adhere to these findings while lending the credit to firms and the individuals for starting off their entrepreneurial ventures.
Components of Credit Policy:
The following are the three major components behind the credit policy:
- Terms of Sales
- Credit Analysis
- The Collection Policy.
1 – Terms of Sale:
The Terms of sale” is composed and organized in accordance with the condition upon which the company hands out the goods in the market that are either on cash or on credit. It includes the time frame for the goods purchased on credit terms along with cash discount and discount period that are evaluated as per the transaction.
2 – Credit Analysis:
The ‘credit analysis’ highlights the factors that affect the decision of approving or disapproving transactions made on credit terms to the particular customers. It involves a complete run-down of an individual who shows willingness to purchase products on credit terms including his total financial reserves.
3 – Collection Policy:
It is the last component in the overall hierarchy of ‘credit policy’ which emphasizes on the monitory receivables. It ensures that customers have settled on their pending amounts issued on the past accounts and so on.
More Information Related To Credit Policy:
It has been recommended to the companies that once we finish making credit standards, our entity must evaluate the time frame which borrowers need to utilize before making the full credited amount.
It also emphasizes on the ‘discount policy’ for consumers interested in returning the loan a little earlier than expected. In addition, the accounting standards embark on mentioning the exact discount proportion before moving on with the transactions i.e. “determining the right discount ratio” for the borrowers.
There are various kinds of discounts that are given to reward the customers as per their settled policies:
- The prompt payment discount
- The preferred payment discount (paying cash instead of the credit card)
- The discount upon partial payment
- The trade discount (when a borrower shows willingness to start off with a business activity on instant basis)
- The quantity discount.
It is essential to understand that some companies are not even concerned about informing their customers upon crossing the deadline for the first payment. However, other incorporations that invested millions of debts in lending funds are habitual of taking legal actions. Such entities can also send their associates who show full proofs regarding these stagnancies in returning the funds.