Key takeaways
- Credit policy is a growth control, not only a collections policy.
- Customer credit limits should reflect payment history, concentration, margin, strategic value, and exposure.
- Terms exceptions need approval because they change working capital and risk.
- AR aging should be reviewed with customer risk, not just invoice age.
- A clean credit process improves cash conversion, lender confidence, and buyer diligence.
Credit policy protects growth from turning into trapped cash
For adjacent context, compare this with Accounts Receivable and DSO, Cash Conversion Cycle, and Quote-to-Cash Process. Those articles cover receivables, cash cycle, and process flow; this article focuses on customer credit risk.
Current AR and credit-market materials emphasize DSO, payment behavior, credit access, and collections process discipline.
For operators, the key issue is deciding how much customer credit risk to accept before revenue is booked and fulfilled.
A sale is not fully valuable if it creates receivables the company cannot collect on time.
Credit policy
The rules for customer terms, credit limits, approvals, holds, releases, and collections escalation
Customer exposure
Open AR plus unbilled work, open orders, and committed work not yet invoiced
Credit hold
Temporary stop on new work, shipments, or service until payment, approval, or risk review occurs
Many B2B companies extend credit informally. A good customer asks for longer terms. Sales wants the deal. Operations ships or performs the work. Finance sees the exposure only after invoices age. By then, the company has already funded the customer.
Credit policy should happen before fulfillment, not after the invoice becomes overdue.
The practical credit policy
A middle market credit policy does not need bank-level complexity. It needs clear rules for who gets terms, how much exposure is allowed, when exceptions require approval, and when service stops.
Credit Policy Components
Customer onboarding
Credit application, references, tax documents, billing contact, PO requirements, and payment method.
Standard terms
Default payment terms by customer type, size, risk, and contract.
Credit limit
Maximum exposure before additional approval, deposit, partial payment, or hold.
Exception approval
Who may approve extended terms, higher limits, special billing, or release from hold.
Exposure report
Open AR plus open orders, unbilled WIP, and committed work.
Collections cadence
Touch schedule, escalation path, dispute owner, and payment-plan rules.
Hold and release rules
When new work stops and who can release it.
The most important discipline is consistency. If every exception is handled privately by the founder or salesperson, the policy does not exist.
How to review customer credit risk
Customer risk should be reviewed by exposure and behavior, not invoice age alone. A 20-day late invoice from a low-risk customer is different from a growing exposure to a customer already stretching terms.
Frequently asked questions
Who should own credit policy?
Finance should own the policy and exposure reporting. Sales and operations must participate because terms, holds, and release decisions affect customer relationships and delivery.
Should sales be allowed to approve credit exceptions?
Only within defined limits. Large term extensions, limit increases, or releases from hold should require finance approval.
What is the biggest mistake?
Reviewing AR aging without open orders and unbilled work. True exposure includes work not yet invoiced.
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Disclaimer: Financial figures and case-study details in this article are anonymized, composite, or representative examples based on middle market operating situations, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
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