From Policy to Profit: The Value of Having an International Credit Policy and Procedures, by Eddy Sumar

Many believe that having a credit policy is very restrictive, while others say it is not needed because the world is constantly changing and it is difficult to keep up the pace. Yet a third group touts its value in a changing world. From these samplings of answers and beliefs, we can say that credit policies need to be put in the proper perspective and place.

What Policies and Procedures Are and Are Not

Policies and procedures are not a straightjacket. And if they are to be restrictive, it should be with a compelling reason and cause. In fact, they should act as a seat belt that can be expanded or contracted depending on the situation and circumstances. They should not be used as a platform to penalize and punish. They are not meant to be rigid, capricious and inflexible. Though they convey permanency, they are not permanent. Policies and procedures are set to facilitate, not debilitate, the business process. They are set to empower, not to enslave. Policies and procedures are dynamic and they should serve the company as well as the customer. They should be reviewed periodically to ensure that they reflect up-to-date requirements and the real business climate and environment.

When we look at credit policies and procedures from a wider perspective, we can clearly see that they serve an important purpose and a vital role in the health of the organization. They act as strategic guides that point to the direction and path that need to be followed. They spell the tactics that need to be employed, on a daily basis, to ensure control and compliance.

Policies and procedures should be used as guidelines and a platform to facilitate the company’s operations. They create a map that every member of the business enterprise can use to ensure the smooth handling of the tactical and day-to-day operations, as well as to gain insight into the strategic intent of Company. Policies and procedures, if conveyed properly to the sales team and the customer, could help all understand the why, why things happen in a certain fashion. Educating all stakeholders on the Company’s policies and procedures will ensure not only excellence in performance but will result in a more satisfied customer.

In short, policies and procedures are a NEED. Companies need them to safeguard their financial stability and prosperity.

The Five Cs

When a company constructs its policies and procedures, they need to build them on the Five C’s:

1. Compliance
2. Communication
3. Coaching
4. Consistency
5. Cashflow

Compliance: We live in a highly-regulated environment. And companies, both domestic and international, act and interact in this environment. Thus, they need to be aware and compliant with the demands and requirements that the environment presents. No company can afford to be found lacking and non-compliant. International Credit Managers perform strict due diligence on country and client. They ask their prospects and clients to fill out a credit application. They verify, inquire, investigate, obtain credit reports, perform non-financial and financial analysis, employ the AW Matrix, and they cross-check every C of credit before they make a credit-decision. In fact, credit decision makers must be well informed and up-to-date on every development in the environment.

Communication: Credit policies and procedures are a communication tool. Thus, they need to be clear, concise, relevant, and timely. They communicate the vision and mission of the organization and its departments. They are used to communicate with internal and external customers. They communicate goals, expectations, and KPIs. They explain processes and procedures step-by-step. In fact, credit decision makers should use their policies as a vehicle to communicate and build understanding, collaboration, and buy-ins.

Coaching: Because of the detailed nature of policies and procedures, credit professionals should use them as a coaching and training vehicle. They should use them as a tool for coaching and developing employees and clients. When used for coaching, they become easy to adopt and implement. Policies and procedures should be used as a vital component of training manuals and new hire orientation training. In fact, a credit policy and procedure manual should be a book that codifies the existing body of functional, technical, and experiential knowledge to preserve it and later transmit it when needed.

Consistency: A Credit policy, when shared with all stakeholders, pursued zealously, and followed closely should result in consistency and stability. A credit policy spells the path and the steps to be taken as well as provide the guides for well-informed decisions and common sense, intuitive decisions. When all follow the policy with common sense empowerment, then consistency will reign and goodwill will expand.

Cashflow: As the title of this article conveys, policies should lead to profit and expansion of profit. When a company follows its policy, and ensures compliance, it will protect itself from lawsuits and penalties. When a company follows its policy, and ensures that its communication is clear, concise, relevant and timely, then it can save time, efforts, and money in dealing with complaints and internal and external customer issues. When a company follows its policy, and uses it as a coaching tool, then it can save time and money in looking for new personnel and even new clients. Coaching helps training and retaining of employees and clients. When a company follows its policy, and ensures consistency, then it can save enormous amount of resources on reworks, defects, low morale, employee turn-over and loss of customers. And when a company follows its policy, and ensures it cashflow, it has indeed not only protected its profit, but actually realized it when cash was collected and deposited.

I know of a company that has a policy of reviewing its key accounts daily. Every member of the credit department as well as their sales team is daily involved in a debriefing on these key accounts. The consistent application of this policy helped the company reduce its bad debt account and expedite its collection results. Consistent application of policies and procedures PAYS!

In short, a credit policy is not a want or a desire, it is a need that can protect cashflow, realize profit, and create expansion.

Eddy A. Sumar is the President & Founder of ERS Consulting Services. He is a frequent contributor for CMA, and a longtime speaker and educator on international credit related issues. He spoke at a recent International Best Practices Forum meeting, the recording of which is available on demand. He can be reached at 909-481-9869 or

Credit Policy and Procedures

The economic outlook for the year ahead is bleak. Some analysts have forecast that the second half of 2008 will stay mired in the doldrums with annualized growth not returning to near-normal levels until sometime in 2010. Federal
Reserve Board Chairman Ben Bernanke has said the U.S. inflationary picture is shrouded in uncertainty and the maelstrom that resulted in the housing market buckle and the credit freeze has yet to subside.

Nonetheless, business must press forward.

Most companies have set certain tolerance levels for their risk appetite based on factors such as position in the marketplace, margins, sales channels, as well as the creditworthiness of a particular customer. For most credit professionals, the stark reality is that there are simply accounts to which they must sell, no matter what. Credit reports are an aid, as are other tools, but there also must be a tangible set of credit policy and procedures in place.

“How many of us really decide which customers are sold to?” asked Susan Delloiacono, CCE, director of credit, Brother International Corporation, at the CMA-sponsored teleconference “Credit Policy & Procedures.”

“In my experience, some of my customers are not my choice by a long shot. Rather, I have to find a way to deal with everyone that’s presented to me.”

Delloiacono’s presentation focused on cobbling together the “bones” for attendees to develop their own credit policies, instead of merely creating a point-by-point template to which members could try and fit their businesses. She discussed that it’s difficult as a credit person to try and utilize a generic credit policy outline because factors like terms are typically dictated by the sales department and there are accounts that executives will press credit managers to accept. Furthermore, there are times when customer delinquencies are viewed differently.

“A policy that mandates and dictates certain behaviors always has to have an exception-based rule. At least that’s what I’ve found in my experience,” said Delloiacono. “We’re flooded with information from the Internet, from alerts we’ve set up in the credit world. It’s so much information that it’s hard to put that all into a funnel and have it come out and translate into a one-size-fits-all policy.”

She added, “Money is tightening up. And credit is really getting a spotlight at this point in time. I think we all agree that there’s tension within our own companies with the attention on being paid. Accounts receivable and credit extension practices are under scrutiny.”

For most credit professionals, she suggested that there has to be a sort of double-vision in place: one view that takes in the macro economic picture, and one view that examines the micro or localized picture, the structure within their own company.

“In the global marketplace, many things from wars to fuel are creating uncertainty,” said Delloiacono, who suggested credit managers ask themselves: how does that affect me? “Look at the global marketplace and be aware of what is around you. Sometimes as credit people we can be very binary—just looking at the ‘yes’ and ‘no’ of a credit decision without really considering all of these external factors.”

With consumer confidence waning, consumer spending has been reined in, with non-discretionary spending being severely impacted by surging energy costs and plummeting home prices. The overall implications are broadly felt as capital and cash flows of businesses in turn have continued to get tighter.

As to relationships within their own companies, Delloiacono cited that credit managers need to consider broadening their view.

“As credit people, there are some departments that we don’t interact with, but we should,” said Delloiacono. “Our sales department; that’s a no-brainer. We know we are dealing with sales; we know we are dealing with order management. Somehow or another, we don’t look at product development as something we need to concern ourselves with. And that’s a mistake for credit people to take that approach. It’s important for you to understand where your company fits and what solutions they have planned for in the future.”

For developing a credit policy she said this was paramount knowledge.

“My counsel to you is to know your business,” said Delloiacono. “Is your company sales- or top-line driven versus
profits, profits, profits? That dictates how you’re going to react in the credit granting area. If you are really bottom-line driven, you may be really tough on credit and softer on collections. If you’re soft on credit, typically you’re
working for a very marketing-driven company; a very sales-driven company that’s like ‘ship it, ship it, ship it.’ If you have that kind of attitude, you better be tough on the collections side.”

Another consideration for credit professionals is whether the company they work for is public or private. Do they
deal with Sarbanes-Oxley (SOX) issues? That will likely dictate how a lot of a credit policy is interpreted and what procedures the credit manager is going to have to have in place to support those overall SOX initiatives.

Delloiacono also said it was imperative that credit professionals know their industry and become a member of an industry credit group, and that credit managers incorporate their knowledge of how the current economic factors of
their company can be used to maximize sales, minimize carrying costs in accounts receivable, minimize bad debt and monitor costs.

“If we look at what our job is as credit people, it’s just those four things,” said Delloiacono. “Those four components are key to setting credit policy.”

Advice from CMA’s Legal Workshop on Credit Agreements

On January 24th and 25th, attorneys Bruce Nathan, Esq., Lowenstein Sandler PC,
and Wanda Borges, Esq., Borges & Associates LLC, hosted the first of three
sessions in CMA’s 2008 Legal Workshop series. The two attorneys are familiar
faces in the association’s educational programs, and teamed up to speak in-depth
about credit applications and guaranties and the information that should and
should not be included in them.

The two-day session provided a wealth of information and advice on topics
ranging from references, stoppage of delivery, reclamation, compliance with
federal law and the “Battle of the Forms” to navigating antitrust violations,
and oft overlooked protections.

First and foremost, both agreed that every credit application should include
language, in bold, that verifies that the grantor adheres to the provisions of
the Equal Credit Opportunity Act (ECOA) and that there must be some reference to
the grantor’s standard terms and conditions, either by including them in the
credit application or noting that they are posted on the creditor’s website.

“Your terms and conditions have to be prevalent,” said Borges. “If the first
time your customer sees them is on the back of an invoice, you’ve got a problem.
More and more companies are putting the data on their website. If you’re going
to put your terms and conditions on your website, you have to make them readily

Under Article II of the Uniform Commercial Code (UCC), the failings of which
took centerstage, if the first time a customer sees terms and conditions is on
an invoice, it won’t always serve as confirmation or agreement to those

“The thing I love about Article II is that everybody is right,” said Nathan.
“There are court cases that say the invoice serves as confirmation of terms and
conditions, there are others that disagree. Do something such as posting them on
a website to lock in the terms and conditions.”

In terms and conditions, grantors want to make sure that the laws of the state where they are headquartered are recognized to rule in any legal proceedings. The two also suggested that interest rate charges and the
reimbursement of at least a portion, such as 25%, or all legal fees are included in the terms and conditions or on the credit application as well. Credit executives need to be wary though that if they do include interest charges on
invoices they must make their best effort to collect on them. If they are only collecting the charges from certain customers and not all, they may find themselves facing antitrust violations of the Robinson-Patman Act.

Common practices, such as asking for the social security numbers and home
addresses of board members, officers and other executives may not always end in
results, as most credit executives will know. The new privacy laws provide
individuals protection against having to submit these on a credit application,
and denying credit because an application is without these pieces of information
may lead to violations. Though the majority of attendees of the workshop
included sections on their applications asking for the social security numbers,
they all agreed that it was irregular for those to be given.

Other basic measures Nathan and Borges discussed were the importance of
verifying a company’s legal name before granting credit, as well as verifying
that the individual signing the application or a personal guaranty has the
authority to do so. They suggested checking the Secretary of State records and
website, and touted a subscription with court document websites such as PACER as
a must.


For more information on CMA’s education program, visit

Credit Applications Are Important Legal Documents

The role of credit applications in the credit and collections process was explained in a CMA teleconference Sept. 11, 2006, entitled, “Credit Applications Are Important Documents.” The presenter was Lynnette Warman of the Dallas-based law firm of Jenkens & Gilchrist.

Warman said that the credit application might serve several functions such as gathering pertinent company information, establishing a security interest, securing personal of corporate guarantees and establishing credit terms. “It’s important to get all the information you need from your customer,” Warman added; and advised getting the credit application completed with all the information it requests.

Some of the critical information she mentioned that should be obtained in a credit application included the legal name of the customer, legal names of the owners and manager and the street address of the customer—not a post office box. Warman stressed the importance of making sure the information is completely accurate. She recounted a Kansas State Supreme Court decision in March, where a company lost a security interest in a priority dispute because the first name of a principal of the debtor company was incorrectly spelled.

The organizational structure of the customer must be properly identified, she noted: whether it’s a sole proprietorship, a partnership, or an LLC can affect what actions for non-payment might be taken against it. “Each type of company has ramifications if you are trying to sue them for non-payment,” she said. She pointed out, for example, that if there is no personal guarantee from a corporation, there might be no recourse for non-payment. She also mentioned that with a sole proprietorship, one is able to sue the individual—as well as the business—for unpaid bills.

The information presented by a customer on a credit application should be verified. Warman noted that with the advent of the Internet, finding and verifying company information is easier: many Secretaries of State are now charging for corporate information they once provided for free, but it is more easily obtainable over the Internet. She also advised making sure all appropriate signatures are included on the credit application and that it is legible.

Stating in the credit application what court should have jurisdiction over any disputes has become more recognized by the courts, Warman said, and that it is important to also include that it is the customer’s responsibility to alert the creditor about any changes in its ability to pay. Any change in credit terms from the credit application should be sent out in the form of a written notice to the customer—and the credit application itself should be reviewed every couple of years to make sure it conforms to the latest requirements of relevant laws relating to business credit.