Credit Policy & Procedures Flashcards

A credit policy specifies net-30 payment terms as standard. A new customer requests net-60. Under what condition would granting net-60 BEST align with sound credit practice?

Answer: The customer's industry standard is net-60 and their financials support extended terms

Extended terms should be granted only when the customer's financial strength and industry norms justify the longer exposure period.

Which document is MOST commonly used to communicate credit policy requirements to new customers during onboarding?

Answer: A credit application

A credit application collects the financial and reference information needed to evaluate new customers under the terms of the credit policy.

A company's credit policy requires personal guarantees for all closely held companies with less than three years of operating history. A two-year-old LLC applies for credit. What applies?

Answer: A personal guarantee from the principal owner is required per policy

Policy explicitly covers closely held companies under three years old; LLC structure does not exempt the applicant from the guarantee requirement.

What metric is MOST directly used to evaluate whether a credit policy is achieving its receivables management objectives?

Answer: Days Sales Outstanding (DSO)

DSO measures the average number of days to collect payment and directly reflects the effectiveness of credit terms and collection procedures.

A credit policy includes a clause requiring annual financial statement submission from all accounts over $500,000. A key customer refuses to provide statements, claiming confidentiality. What is the appropriate response?

Answer: Explain the policy requirement and, if refused, reduce credit exposure or place on COD

Policy requirements for financial disclosure are a condition of credit extension; noncompliance justifies reducing exposure or requiring cash-in-advance terms.

Which type of credit policy structure grants the credit department the most authority to make independent decisions?

Answer: Policy with delegated authority tiers based on credit limit size

Tiered delegated authority allows credit professionals to approve smaller exposures independently while escalating higher-risk decisions appropriately.

A credit policy review committee meets annually. During the review, it is discovered that bad debt write-offs have increased 40% year-over-year. What policy area should be examined FIRST?

Answer: Credit limit approval thresholds and underwriting criteria

Rising bad debt write-offs indicate that credit is being extended to customers who cannot pay, pointing to weaknesses in underwriting and limit-setting criteria.