How to Set a Credit Policy That Protects Cash Flow (With a Template)

A credit policy is the written rulebook that decides who gets credit, how much, on what terms, and what happens when they pay late. A workable policy covers five things: your credit application and checks, how you set credit limits, the payment terms you offer, your collection steps, and when an account gets put on hold. Its job is to let you extend credit confidently to good customers while capping what you can lose to the ones who do not pay.

Most small and mid-sized businesses run without a real credit policy, which means credit decisions get made by gut feel, terms vary by whoever cut the deal, and collections only start once cash is already tight. Writing the policy down turns those judgment calls into a consistent process your whole team can follow. Here is how to build one.

Why you need a written credit policy

Every unpaid invoice traces back to a credit decision someone made without enough information. A credit policy fixes that by putting the same standard in front of every customer before you ship. It reduces bad debt by screening out the accounts most likely to default, it makes your terms consistent so your DSO is predictable, and it gives your collections team the authority to act without asking permission each time. Without a policy, credit is granted inconsistently and enforced late, which is the exact recipe for slow cash and write-offs.

The five parts of a credit policy

Step 1: Set your credit application and checks

Decide what a customer has to give you before they get terms, and set a dollar threshold above which you always check. For smaller orders, a signed credit application with basic business details may be enough. Above a threshold you choose, ask for trade references and run a credit check through a bureau like Dun and Bradstreet, Experian Business or Equifax Business. For a large credit line, some finance teams also pull the customer's financials and get an independent read on the health of the business before committing. The point is not to make credit hard to get; it is to know who you are lending to before the first invoice.

Step 2: Set credit limits

A credit limit is the most a customer can owe you at once, and it is your single most important control on exposure. Start new accounts at a conservative limit sized to what you can afford to lose, then raise it as the customer builds a clean payment history. Tie the limit to real signals: order size, credit check results, and how they have paid you so far. Review limits periodically, because a customer who was solid two years ago may be sliding now. The goal is that no single account can put a dangerous amount of your cash at risk.

Step 3: Define your payment terms

State the terms you offer as standard and the conditions for anything longer. Net 30 is the common default; net 45 or net 60 should require sign-off, because every extra day is working capital you hand to the customer. If you use early-payment discounts like 2/10 net 30, define when they apply. Write down who has authority to grant non-standard terms, so a salesperson cannot quietly commit you to net 60 to close a deal. Consistent terms are what make your incoming cash predictable.

Step 4: Write the collection steps

This is the section most policies skip, and it is the one that actually protects your cash. Spell out exactly what happens once an invoice is due: when the first reminder goes out, when follow-up escalates from email to a phone call, and who owns each step. A clear cadence, for example a reminder at the due date, a call at 15 days past due, and a firm escalation notice at 45, means overdue invoices get worked on schedule instead of whenever someone has time. Running that cadence by hand across a full aging report is exactly the work an AR automation agent can execute for you, chasing every past-due account by email, SMS and phone without a person tracking the calendar.

Step 5: Set holds and escalation rules

Decide the point at which a customer stops getting more credit. A credit hold, where new orders are blocked until the past-due balance clears, is your strongest lever, and it works best when it is automatic and impersonal: at a defined number of days past due, the account goes on hold, no argument required. Define when an account moves to a formal demand, when it goes to a collection agency or attorney, and when a balance is written off against your allowance for doubtful accounts. Making these triggers rules rather than case-by-case decisions keeps emotion and hesitation out of the moment you can least afford them.

How to enforce a credit policy without losing good customers

A policy only protects you if you actually apply it, and the fear that enforcement will annoy customers is what stops most teams. The answer is consistency and professionalism, not leniency. Customers respect a supplier whose terms are clear and whose follow-up is predictable; they take advantage of one whose enforcement is random. Apply the same steps to everyone, keep the tone professional, and escalate by the calendar rather than by mood. Good customers barely notice a well-run credit policy, because they pay on time anyway. It is the slow payers who feel it, which is exactly the point. For the tooling side of this, a dedicated credit management platform tracks limits, exposure and terms in one place.

Review the policy on a schedule

A credit policy is not set once and forgotten. Review it at least annually, and sooner if your bad debt is climbing or your DSO is drifting up. Watch the gap between the terms you set and the DSO you actually run: if you offer net 30 and your days sales outstanding sits at 45, either your limits are too loose or your collection steps are not being enforced. Tighten the part that is leaking, communicate any changes to your team, and keep the policy a living document that matches how your customers actually pay.