Credit policy is very important because companies use credit as a significant tool for expanding sales and profitability. The chapter describes the five key elements of credit policy in some detail and reviews the trade-off faced by the business in deciding on each element of credit policy. Credit starts with the terms of sale, which set forth the details of how the customers are required to pay for their purchases. The credit terms also specify the credit period and discount offered, if any. The second element of credit policy deals with the evidence of indebtedness or how the firm formalizes the debt owed to it by the customers. Companies do informal or formal credit analysis (the third element) to qualify customers for offer of credit and then decide the amount of credit (the fourth element) to be offered. The last component deals with the procedures for collection of delayed and delinquent payments.

Credit policy should be seen in the broad context of the operational and strategic management of the firm. The primary objective of the credit policy should be in line with the corporate management objective of shareholder wealth maximization. To this end, the policy details should aim at maximizing the overall profits rather than narrower goals such as sales maximization or bad debt minimization.