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How to Create a Credit Policy for Your Business

As your business grows, there comes a point where you may have to sell on credit to increase your sales. Many retailers and distributors expect credit, and if you never offer it, you may lose customers to competitors who do.

But selling on credit without clear rules is one of the fastest ways to run into cash flow problems. If you rely on trust, verbal promises, or long-standing relationships alone, you could end up with unpaid invoices that tie down your money and make it difficult to restock your business.

That is why every business that sells on credit should have a written credit policy. A credit policy sets the rules for who can buy on credit, how much credit they can get, when they are expected to pay, and what happens if they fail to pay on time. It helps you grow your sales without putting your business at unnecessary risk.

Here is a simple guide to creating a credit policy that works.

1. Start with Small Credit Limits

One of the biggest mistakes business owners make is giving a new customer a large amount of credit from the very beginning. Instead, let customers earn your trust over time.

Begin with a probation period: Ask every new customer to buy on a Cash and Carry basis for their first three to five purchases. This gives you time to observe how they do business and whether they are reliable.

Offer a small credit limit: Once the customer has built some trust, you can offer a modest credit limit. For example, depending on your business, you could start with a limit of ₦100,000 to ₦200,000.

Increase the limit gradually: Do not increase a customer's credit limit simply because they ask for it. Increase it only after they have paid their previous credit purchases on time at least three times in a row. Customers who pay consistently should earn higher limits. Those who pay late should not.

2. Decide When Customers Must Pay

Your credit policy should clearly state when payment is due. Never assume customers know your expectations. Your payment terms could be:

7 days
14 days
30 days
60 days

Choose a payment period that works for your business and communicate it before the customer receives any goods on credit. Both parties should understand the payment date from the beginning.

3. Follow Up on Every Outstanding Payment
A credit policy is only useful if you follow it consistently. Keep a record of every customer who owes you money. Your records should show:

How much the customer owes
When the goods were supplied
When payment is due
Whether they have paid on time in the past

More importantly, create a routine for following up on unpaid invoices. For example, you could send:

A reminder a few days before the due date.
Another reminder on the due date.
A follow-up call or message a few days after the due date if payment has not been made.

When customers know that your business keeps track of outstanding payments and follows up consistently, they are more likely to pay on time.

If managing this becomes overwhelming, working with a debt management partner like OnCRE can help you monitor outstanding debts, maintain consistent follow-ups, and help you recover payments without damaging customer relationships.

4. Stop Giving Credit to Customers Who Have Overdue Payments
This should never be ignored. If a customer has not paid an overdue invoice, do not continue supplying them with goods on credit.
Instead:

Pause all further credit sales.
Require them to pay cash for any new purchases.
Where possible, use part of that payment to reduce the outstanding debt.

If you continue giving more credit to someone who already owes you money, you are increasing your chances of losing even more.

5. Decide What Happens When Customers Pay Late
Your credit policy should clearly explain the consequences of late payment.
For example, you could:

Charge a late payment fee, such as 1% of the outstanding balance for every week the payment remains unpaid.
Reduce the customer's credit limit.
Return the customer to Cash and Carry until they build a good payment record again.

When customers know there are consequences for paying late, they are more likely to take your payment terms seriously.

6. Decide Who Can Approve Credit
Not every employee should be allowed to approve credit sales. Sales representatives are usually focused on making sales, and in many businesses, they earn commissions based on how much they sell. That means they may approve credit too easily just to close a deal.

For this reason, the final decision to approve credit should be made by the business owner or a manager who is responsible for managing customer debts.

A good credit policy is not about making it difficult for customers to buy from you. It is about protecting your business while building lasting customer relationships.

When you set credit limits, define clear payment terms, follow up consistently, and enforce your policy, you can grow your sales without putting your cash flow at risk.

If you need support beyond creating a credit policy, OnCRE offers end-to-end credit management solutions to help businesses sell safely on credit. Our services include customer verification, credit assessments, debt tracking and debt recovery to help you reduce bad debts and strengthen your cash flow.