A credit policy is not a document. It is a limit somebody has to dare to enforce

We have read a great many credit policies. They resemble one another closely, and almost all of them are right.

They say that new customers are credit-assessed. They say that a credit limit is set. They say that deliveries are stopped in the event of material default. It is well written, it is sensible, and it has been approved by the executive board.

And then there is the one thing that appears nowhere: who calls the salesperson to say that his largest customer will not be getting goods next week.

The policy works perfectly well — on the customers who do not matter

Take your own credit limit seriously for three seconds.

The small customer who exceeds it has his deliveries stopped. It is uncomfortable for nobody. The salesperson grumbles a little, the accounts department is proved right, and everyone moves on.

The large customer who exceeds it is granted a waiver. Not because anybody decided so — but because nobody decided otherwise. The matter is raised, it is deferred, it is “resolved next week”, and in the meantime the deliveries go out.

It is the same policy. It is simply only enforced where it does not hurt.

And that is precisely where it is worthless. A credit policy is not a defence against bad customers. Bad customers are small, and when they go under they take an amount the business can carry. A credit policy is a defence against good customers who have grown too large. They are the ones who topple a receivables ledger, and they are the ones the policy is never used on.

Why this is not a question of courage

You could tell the story as one about cowardice: that nobody dares to call a halt. That is too easy, and it is not true either.

The reason nobody stops the deliveries to the large customer is that the decision belongs to no one. Sales owns the customer, but not the risk. Finance owns the risk, but not the customer relationship. The chief executive owns both, but only hears about the case once the amount is large enough that it is too late to stand on principle.

That is not a flaw of character. It is an organisation chart.

Which is why the most important sentence in a credit policy is not the limit. It is the name of the person who decides when the limit is exceeded — and what happens if that person decides nothing at all. A limit without an owner is a statement of intent, and a statement of intent will be breached by the first customer who is big enough.

Three lines that turn a policy into a decision

Who calls a halt. One role, by name. Not “the finance function” and not “in consultation with sales”. One.

What happens automatically if nobody does anything. This is the most important of the three. A rule that requires an active decision in order to be enforced will never be enforced — because it is always easier not to. Turn it around: deliveries are stopped when the limit is exceeded, unless somebody actively grants a waiver, and the waiver is written down with a name against it.

What your terms of trade say. The right to stop deliveries, the right to demand security, the retention of title. That is what determines whether you are even permitted to do what you have decided. A credit policy with no backing in what the customer has signed is an internal ambition.

What the customer knows

Finally, it is worth saying the uncomfortable part out loud.

The customer who consistently pays you last has not misunderstood anything. He has done the arithmetic correctly. He knows that you will not stop the deliveries, because he is too big — and he knows that his other supplier will, because that supplier dares to.

So he pays the other one first.

It is not hostility. It is liquidity management, and it is exactly what any of us would do. A credit policy that is enforced is therefore not a punishment. It is the only way to get into the pile that gets paid.