What is a credit policy for a small business?

A credit policy is the document, formal or informal, that spells out how a business decides whether to let a customer pay later instead of paying up front. It usually covers three things: who qualifies for credit in the first place, what terms those customers get, and what happens when an invoice goes past due. Many small businesses operate without a written credit policy and rely on the owner's judgment, which works until it doesn't.

The most important part of the policy is not the credit limits themselves but the consistency. Two customers with similar profiles should get similar terms and similar follow-up when they fall behind. Without that consistency, collections becomes a set of one-off negotiations, and the business ends up enforcing its own rules unevenly.

A credit policy also gives the team permission to act. When a customer goes 15 days past due, the team does not have to decide whether to call; the policy already says a call goes out. That shift from decision to execution is where automated AR tools add the most value: the policy is encoded once, and every invoice that matches a rule gets the same treatment.