How to Write a B2B Credit Policy

A B2B credit policy is a short written document that says who gets credit, how much, on what terms, who approves exceptions and what happens when customers pay late. It protects cash by setting rules before problems occur and gives sales and finance a shared playbook. This guide explains what to include, how to set limits and terms with worked calculations, how to score customers and how to keep the policy alive. It supports cash flow management and the methods in how to speed up accounts receivable collections.

Why you need a written policy

Without a policy, credit decisions depend on who is asking and how much pressure the sales team applies. The common results are inconsistent terms, large exposures to a few customers, surprises when a customer fails and disagreements between sales and finance. A written policy:

• Sets consistent standards for new and existing customers.
• Limits risk by capping exposure.
• Speeds decisions, because the criteria are known.
• Supports collections, since terms and consequences were agreed upfront.
• Gives lenders and auditors confidence.

A policy can be two pages for a small company. Length is less important than clarity.

What to include

1. Purpose and scope

State the objective: to support profitable sales while limiting credit losses and keeping cash flowing. Define which customers and transactions the policy covers.

2. Roles and responsibilities

3. Credit application and information required

Collect before extending credit:

• Legal business name, address, tax ID and ownership
• Years in business and type of entity
• Bank reference and trade references
• Billing and accounts payable contacts
• Expected monthly purchases
• Signed agreement to your terms, including late fees and collection costs, and personal guarantees where appropriate

4. Credit evaluation

Define the checks: business credit reports, trade references, bank references, public records, financial statements for larger exposures and your own payment history for existing customers.

5. Credit limits and how they are set

State the method and the authority levels (see below).

6. Standard terms and exceptions

State the standard terms (for example, net 30), when other terms are allowed and who can approve them. See net 30 vs. net 60 and 2/10 net 30 explained.

7. Invoicing and delivery

Specify when invoices are sent, what they must contain and how they are delivered.

8. Monitoring and review

Specify how often limits and customers are reviewed, which reports are used (see the accounts receivable aging report) and what triggers an immediate review.

9. Collections and escalation

Define the dunning schedule, the point where new orders are held and the steps toward formal collection.

10. Disputes, credits and write-offs

Set the process for logging and resolving disputes, the authority to issue credits and the rules for writing off bad debt.

11. Policy review

State that the policy is reviewed at least annually and who approves changes.

Scoring customers

A simple scorecard makes decisions consistent. The weights and scores below are an illustrative example; adjust them to your business.

Rate each factor 1 to 5, multiply by the weight, add the results and divide by 5 to get a score out of 100.

Example for a hypothetical applicant: payment history 4, financial strength 3, years in business 5, industry risk 3, bank reference 4, strategic value 4.

• Payment history: 4 × 30 = 120
• Financial strength: 3 × 25 = 75
• Years in business: 5 × 10 = 50
• Industry risk: 3 × 10 = 30
• Bank reference: 4 × 10 = 40
• Strategic value: 4 × 15 = 60
• Total = 375, divided by 5 = 75

Map the score to a tier:

The applicant scores 75, so it falls in the moderate tier.

Setting the credit limit

A simple approach links the limit to how much the customer will owe at peak under normal behavior.

Limit = Expected monthly purchases × (Terms days + Expected days late + Buffer days) / 30

Example: a customer is expected to buy $40,000 a month on net 30 terms. Similar customers pay about 8 days late, and the policy adds a buffer of 7 days.

• Limit = $40,000 × (30 + 8 + 7) / 30 = $40,000 × 1.5 = $60,000

Then cross-check against the customer's financial strength. Many companies cap the limit at a share of the customer's net worth or working capital, or at a fraction of their own equity, to avoid concentration in one customer. For example, a policy might say that no single customer's limit may exceed 10 percent of the company's receivables without CFO approval. Choose the cap that fits your risk appetite.

For new customers, start with a lower limit and raise it after a few on-time payments.

Approval authority

Define who can approve what, so decisions are quick and controlled.

The dollar thresholds are examples. Set them by the size of your business and tolerance for loss.

Terms and exceptions

Keep standard terms simple. When salespeople request an exception, require them to submit:

• The customer and the amount
• The requested terms and the reason
• The cost of the exception (use the calculation in net 30 vs. net 60)
• The expected benefit
• The proposed review date

Exceptions without cost calculations become permanent and expensive.

Collections and holds

Put the dunning schedule into the policy. For example:

Make the credit hold process fair: send a notice before placing a hold, and name who can release it.

Monitoring existing customers

Review the following on a regular basis:

• Payment behavior: average days to pay, past-due percent and disputes
• Limit utilization: customers near or over their limit
• Credit reports and alerts for significant changes
• Concentration: share of receivables from the largest customers
• News about major customers

Reassess limits at least once a year, and sooner when a trigger occurs, such as a missed payment, a change in ownership or negative news.

A template outline

You can adapt this outline into a two- to four-page policy.

1. Purpose and scope
2. Roles and approval authority
3. Credit application requirements
4. Credit evaluation and scoring
5. Credit limit methodology
6. Standard terms and exception process
7. Invoicing standards
8. Monitoring and review
9. Collections schedule and credit holds
10. Disputes, credits and write-offs
11. Reporting (aging, DSO, past due, bad debt)
12. Policy review and approval

Rolling it out

1. Draft the policy with input from sales, finance and operations.
2. Test it on a sample of recent customers to see where it would have helped or blocked sales.
3. Get leadership sign-off.
4. Train the team, especially sales, on why it exists.
5. Communicate to customers where terms change, giving notice.
6. Track results: DSO, past-due percent, bad debt and the number of exceptions.
7. Review and update.

How the policy supports cash and planning

A credit policy affects DSO, bad debt and customer concentration. It feeds the cash forecast by clarifying when customers should pay and what happens when they do not. See how to build a cash flow forecast you will actually use. It also guides sales terms and pricing. For companies selling products, it should align with production and inventory plans so that credit is extended to customers whose orders drive your demand plan, a connection discussed in demand planning and inventory optimization.

If you plan to use software to enforce the policy, see accounts receivable automation software: what to look for. If you want to sell or finance receivables, the policy and the quality of your credit decisions will matter to the lender or factor. See invoice factoring vs. invoice financing.

Common mistakes

• Writing it and filing it. A policy that no one uses is no protection.
• Setting limits without data. Base them on purchase volume and customer strength.
• Allowing exceptions without cost.
• Not reviewing existing customers.
• Letting sales approve their own exceptions.
• Making the policy too complex. Simpler rules are followed more often.
• Ignoring concentration. Large exposures to a single customer deserve special attention.

FAQs

What should a B2B credit policy include?

Purpose, roles, application requirements, evaluation and scoring, credit limit method, standard terms and exceptions, invoicing standards, monitoring, collections steps, dispute handling and review.

How do I set a credit limit for a new customer?

Estimate expected monthly purchases, add terms, expected lateness and a buffer, and cap the limit based on the customer's financial strength and your risk tolerance. Start lower and increase after good payment history.

Who should approve credit?

Define authority levels by amount. Small limits can be approved by a credit analyst or manager, and larger limits by the finance lead, CFO or owner. Salespeople should not approve their own exceptions.

How often should I review customer credit?

At least annually, and whenever payment behavior changes or negative information appears.

Do small businesses need a credit policy?

Yes. A short policy protects cash and avoids inconsistent decisions. It can be one or two pages.