The three primary components of a firm’s credit policy are credit standards, payment date, and price changes.
- Credit standards are the rules the company uses to determine which customers are acceptable credit risks. This is generally done by performing a credit analysis of the potential customer to get a sense of its financial health and whether it rigorously pays its obligations.
- Payment date is the date on which the customer is asked to pay, often a set number of days from receipt of the product or the invoice.
- Price changes are often used to motivate prompt payment. The traditional way to change prices is through a discount for early payment, although today, many companies charge a fee (effectively interest) instead for each month payment is late.