CCP Credit Policy & Procedures 3 — Questions and Answers
Question 1: 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?
- The customer's industry standard is net-60 and their financials support extended terms (Correct answer)
- The salesperson guarantees the account will pay on time
- The customer is a publicly traded company
- The customer offers to place a larger initial order
Correct 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.
Question 2: Which document is MOST commonly used to communicate credit policy requirements to new customers during onboarding?
- A credit application (Correct answer)
- A non-disclosure agreement
- A purchase order
- A bill of lading
Correct 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.
Question 3: 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?
- No guarantee is needed because the LLC provides limited liability protection
- A personal guarantee from the principal owner is required per policy (Correct answer)
- The policy applies only to sole proprietorships, not LLCs
- The guarantee requirement can be waived if the order is small
Correct 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.
Question 4: What metric is MOST directly used to evaluate whether a credit policy is achieving its receivables management objectives?
- Gross margin percentage
- Days Sales Outstanding (DSO) (Correct answer)
- Inventory turnover ratio
- Return on equity
Correct 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.
Question 5: 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?
- Accept the refusal and maintain the existing credit limit
- Reduce the credit limit to below $500,000 to avoid the requirement
- Explain the policy requirement and, if refused, reduce credit exposure or place on COD (Correct answer)
- Waive the requirement since the customer has a good payment history
Correct 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.
Question 6: Which type of credit policy structure grants the credit department the most authority to make independent decisions?
- Centralized policy with all approvals at the executive level
- Decentralized policy with branch-level authority
- Policy with delegated authority tiers based on credit limit size (Correct answer)
- Policy requiring sales department co-approval
Correct 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.
Question 7: 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?
- Payment discount terms
- Credit limit approval thresholds and underwriting criteria (Correct answer)
- Invoice format and numbering conventions
- Salesperson commission structures
Correct 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.
CCP Credit Policy & Procedures 3
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?