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Credit Policy Guide for Businesses

As a small business owner, you set an ultimate goal to turn a profit on your passion project. Offering a variety of payment options gives you more opportunity to boost your bottom line, while also giving your customers the flexibility to pay with the method that works best for them.

Customer credit is a popular payment option for both B2B and B2C transactions, but incorporating customer credit into your accounts receivable can be intimidating at first.

In this guide, we’ll define customer credit and its pros and cons, discuss credit policy options, identify how to mitigate risk with credit reports, and explain how your business can start offering customer credit if it makes sense to do so.


In this article, you will learn:

What is customer credit?

Customer credit is a form of payment that allows small business customers to purchase a product or service before paying for it in full. The process works similarly to the way a credit card does—you procure something and pay it back later. But when a small business offers customer credit, they take on the credit risk, not the credit card company.

Credit is a very common payment structure for small businesses, especially when conducting business to business (B2B) transactions. In fact, an estimated 55% of total B2B sales in the United States are paid using customer credit.

What exactly does customer credit look like? Let’s go over an example of how customer credit works in a B2B transaction:

Let’s say you supply fresh fish to local restaurants, and you allow your restaurant partners to pay in credit. You invoice them for the total amount due, outlining your payment terms, which may include information on late fees and credit limits. This is a typical example of what customer credit looks like.

Why is customer credit important to businesses?

Customer credit gives your clients a little extra wiggle room to pay for the products or services ordered. This can be especially helpful when conducting B2B transactions with other small businesses that may not have the cash flow upfront but can pay later on down the road.

Benefits of offering customer credit

Inviting your customers to pay by credit can offer up a variety of potential benefits:

  • Keeps you in line with competition: If your competitors allow customers to pay by credit, it may be in your best interest to follow suit and align your operations with your industry’s standard. In addition, offering more flexible or favorable payment terms may give you an edge on your competition.
  • Offers opportunity for increased sales: More ways to pay simply gives you more opportunities to earn. New customers may come in because you offer credit, or they may be able to make more orders with the flexibility of your payment terms.
  • Improves customer relationships: Besides being a convenient way for your customers to pay their bills, credit also shows that you value and trust your clients to make payments. This can help facilitate long-term contracts and tight-knit relationships with loyal customers.

Risks of offering customer credit

  • Disrupts accounts receivable funding:  Giving your customers the option to pay with credit gives them more flexibility and time to make their payments, but it can also cause cash flow problems. If you’re selling your services but aren’t generating income until much later, it may be harder to make ends meet.
  • Runs the risk of late or unfulfilled payments: The biggest risk of offering customer credit is the credit risk—the possibility that your customers pay late or don’t pay at all. In fact, an estimated 48% of customers delay credit payments.
  • Creates management challenges for accounts receivable: Having a bunch of pending payments in your AR financial statements can make it harder to manage your business’s finances.

What is a credit policy?

A credit policy is a set of guidelines a business uses to set payment terms for its customers. A credit policy also acts as a document for internal reference.

A credit policy can include guidelines such as:

  • The payment due date
  • The maximum amount a customer can buy on credit, also known as the credit limit
  • Credit terms, like what happens if a payment is past due
  • Accepted methods of payment
  • Information on early payment discounts
  • Collections methods for unpaid invoices
  • Delinquent accounts policy
  • Description of the structure of your small business’s credit department and the credit manager’s contact details

Why are credit policies important?

Credit policies are important for several reasons: they create payment guidelines and offer instructions for your customers to complete payment. But ultimately, credit policies protect your small business financially by establishing payment expectations and, in turn, minimize the number of bad debts you may have to write off at the end of the year.

Components of a credit policy

Now that you’re familiar with the purpose credit policies serve, let’s take a closer look at the components of a credit policy.

Credit limit

Credit limit describes the maximum amount of credit your small business will offer to customers. Just like credit card companies limit how much you can spend as part of their credit risk management, so too can small businesses. Setting a credit limit can help you keep your accounts receivable funded and, ultimately, protect your small business’s cash flow. You may choose to set the credit limit for individual customers according to factors like their credit history.

Credit terms

Credit terms outline the credit agreement you have with your customer. These terms can include the payment due date, penalties for late payments, and guidelines for when credit can be extended.

Collections methods

Collections methods indicate the actions your business can or will take if customer payments are not fulfilled. Typically, businesses will seek initial payment with an invoice, followed by a reminder, and later, legal action and pursuit with the help of a collection agency.

Grow Your Business with QuickBooks

Customer credit policy example

Now that you have a clearer understanding of customer credit and credit policies, it’s time to create your own terms of sale. Use the template below to get started.

Sample credit card policy worksheet

How to offer credit to your customers: Best practices

If you plan to offer credit to your customers, consider these best practices:

1. Check the customer’s credit

When you allow customers to pay with a credit card, the credit card company assumes most of the risk if the cardholder fails to pay their bill. But when small business owners allow customers to pay on credit via check or invoice, the business takes on the risk of the customer’s bad debt.

To mitigate risk, some small business owners, or their credit department, will evaluate their customer’s creditworthiness before extending credit. You can run a credit history check on customers through one of the three major credit bureaus, TransUnion, Experian, and Equifax.

2. Share your credit policy

Setting payment expectations with your customers from the start can help you avoid payment issues later on down the road. Before customers pay with credit, make sure they’re aware of your credit policy and agree with the payment terms. A documented policy ensures all parties involved understand the terms of the agreement.

3. Collect applicant information

Collect information from the customers applying for credit, including:

  • Their full name, and DBA (Doing Business As) name if applicable
  • The billing address
  • Purchaser information, as well as business ownership information if applicable
  • If a B2B transaction, you may also choose to collect:
  • The type of business
  • Financial statement
  • Current assets and liabilities
  • The value of equipment under lease
  • A dated inventory count
  • Insurance information
  • Tax ID

This information can help you make informed decisions about whether you should extend credit, and how much you should offer.

4. Invoice the customer

Once you’ve decided to extend credit to a customer, invoices are your way of billing them for the products or services they purchase. An invoice typically includes the amount due, due date, payment methods, and information regarding your credit policy. Sometimes, customers are timely with their payments, while other times they need a reminder.

With QuickBooks, you can easily generate invoices and schedule reminders to get outstanding balances sorted out ASAP.

Accounting for customer credit

Offering customer credit can be a headache without a good process. Streamline your credit sales with QuickBooks. QuickBooks accounting software makes it easy to keep track of unpaid invoices, monitor accounts receivable funding, and more.


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