CREDIT AND COLLECTIONS POLICY: SAMPLE 1

Prepared By:

Approved By:

Revision Date:

Effective Date:

PURPOSE

The purpose is to define credit and collection responsibilities and establish minimum credit and collection
guidelines.

SCOPE

This policy will be uniformly applied to both established and prospective customers.

POLICY

This policy intends to provide for the credit and collection of accounts receivable in a nondiscriminatory manner
while maximizing the company’s profitability by maintaining a moderate level of investment in accounts receivable,
minimizing write-offs of bad debt and maximizing sales. This policy may be modified to suit economic conditions,
competitive situations or company strategy. It is the responsibility of the credit and collections department to
enforce this policy under the direction of the corporate controller and chief financial officer.

PROCEDURES

CREDIT APPROVAL: NEW ACCOUNTS

Credit approval must be obtained for all new customers prior to starting any services being rendered or materials
delivered. With that, the following information must be obtained from the customers and submitted to the credit
department along with a customer maintenance form.
• A completed and signed credit application
• A signed customer purchase order or contract
• If applicable, a completed tax exemption certificate
• Full customer “bill to,” including physical address, phone number and contact name
• If the customer is a subcontractor, the name and address of the general contractor and owner
• Copies of the performance bond or name, address and phone number of bonding company, if applicable
• Payment terms under which the order is accepted, if different from Company X’s due upon receipt policy
• Appropriate approvals if special terms are being granted (see below)
Credit applications and reference checks are not needed if the customer:
• Has a rating of (Insert Rating) or better or is a division (not subsidiary) of a company having such a rating
• A government entity (local, state or federal) or educational institution title is given
• An existing Company X customer with sufficient history to justify the required credit limit exists

An estimate of the potential business volume or value of order or job (credit limit needed) should be indicated on
the form being sent to the credit department when requesting credit approval. If the job must be performed over
some time, that information should also be included.

All billings must be in U.S. dollars.

Whenever possible, all international sales must be conducted under a letter of credit terms (sight or time). Letters
of credit (domestic and international) must be irrevocable and issued/confirmed by a U.S. bank. Bank charges
must be paid by the customer. Any exceptions must be approved by the corporate credit manager.

The following approval levels apply to the establishment of credit guidelines:

Credit Guides Approved By

Under $X The corporate credit/collection manager must perform approvals.

Between $X & $X The above plus the corporate controller must perform approvals. The credit line
approval authorization form must be used.

Over $X The above plus the chief financial officer must perform approvals. The credit line
authorization form must be used.

Credit guides must be annually approved and authorized, depending on the level of credit extended by the
appropriate parties outlined above. Credit guides will be fully documented in the credit file and the accounting
system.

As required, secured credit must be utilized. Copies of security documents must be maintained in the credit file
with the originals stored in the company safe.

A customer’s credit line will be set by the corporate credit department who will also monitor the company’s credit
exposure related to such customers.

Prior to shipping or performing services, the office-designated credit personnel must approximate the value of
materials and/or services to be performed and add this value to the customer’s accounts receivable balance. This
value should not exceed the customer’s credit guide. If/when this condition exists, the corporate credit department
must be notified for resolution.

A courtesy credit limit of $X must be set up for new accounts without the need for an application or a formal credit
investigation and review, provided the appropriate form and physical billing address is provided. This credit limit
cannot be exceeded without conducting an appropriate credit investigation and will be revoked if the initial order is
not paid within credit terms.

If the required information is not provided at the onset, the request for credit approval will be denied until all
necessary information is provided or other arrangements are made.

CREDIT APPROVAL: NEW ORDERS FOR EXISTING CUSTOMERS

All new work for existing customers over $X must be approved by the credit department prior to setting up a new
job number in the accounting system. Depending on the customer, their history with Company X and the nature of
the new job, the credit department may need to update the credit files. Except for the credit application, the office
must also submit the same information identified for new accounts.
CREDIT ANALYSIS
Prior to extending credit to any customer, a proper review of that customer’s financial condition must be
performed and a credit guide must be established by the corporate credit department. The analysis must be
commensurate with the dollar exposure involved. All credit-related information must be maintained in the
customer’s credit file maintained by the credit department.
• In general, a credit file must be established/maintained in the corporate credit department for all customers
regardless of terms or level of credit extended. Depending on the level of credit extended, the credit file should
include some or all of the following: a credit application, financial data, pertinent collection correspondence
(including handwritten collection forms), trade inquires, bank inquires and agency reports.
In general, a collection file must be maintained by credit personnel and must contain the customer’s address,
contact name, phone number and collection documentation.
Credit and collection files must be kept confidentially and updated annually or sooner if credit exposures, payment
trends or collection problems arise. Credit file/information on customers must be considered company
confidential and must not be released to any party without the approval of authorized personnel.
• A credit guide must be established for all active customers. The present accounts receivable balance plus the
value of the new order will determine the credit exposure. An over-the-credit guide condition must be
addressed immediately by the office credit department and resolved via a credit line review by the corporate
credit department. Shipments of products or performances of services should not occur until the corporate
credit department has approved the over-the-credit guide condition.
The purpose of establishing a credit guide is to avoid a continual review of a customer’s credit file on the
occurrence of each order. The credit guide must be considered a “flagged condition” and represent the
maximum amount a customer’s aggregate balance must be allowed to reach without having to review their
general credit standing.

NEW ACCOUNT SETUP

Existing “bill to” information must not be changed to process orders for the same customer having a different “bill
to” than the established customer number. Only credit personnel can change the “bill to” information and only with
written request or documentation from the customer.

If the “ship to” location for the new order or job is different than the existing one, the office needs to set up a
different “ship to” but still use the same “bill to” number.

Provided that adequate and correct information is provided when requests to set up an account are received in
credit, accounts can be set up within 24 hours of receipt but not without conducting appropriate credit checks.
Under emergency conditions, this can be done in a shorter period. Under no circumstances should these
accounts be set up without appropriate credit checks and approval.

Under no circumstances will new accounts be set up because materials have already been shipped or services
have already been provided.

CREDIT LIMITS
Credit limits must be established for all accounts based on the customer’s overall creditworthiness and not on a
value of the initial order. Credit limits must be adjusted up or down by the credit department as situations warrant.
Such limits must be based on sound credit practices and, at the same time, allow for the maximization of
profitable sales. Amounts that are not being paid due to legitimate reasons must be excluded from existing debt
when credit limits are being reviewed or decisions are being made to temporarily increase exposure over the
existing credit limit.

PAYMENT TERMS
Our objective is to maintain the shortest terms compatible with sound business practices, judgment and
competitive conditions. Terms of sale must be communicated and documented with the customer.
• Standard Terms: The company’s standard payment terms are due upon receipt (domestic) and letters of credit
(international). Such terms will be published in company literature and shown on company invoices and sales
quotes. Special terms must be established as the situation dictates and as noted below.
• Special Terms: The corporate credit manager, controller, chief financial officer or their designate in conjunction
with the executive vice president of the respective business unit should, in all cases, approve special terms or
exceptions to standard terms. Special terms must only be considered when competitive conditions mandate
their use and these conditions can be documented. In all cases, special terms or exceptions to standard terms
must be approved and documented via an extended terms request form. This form must be forwarded to the
corporate credit department.
• C.O.D./C.I.A. Terms: These terms will be applied to new or existing customers who, due to their financial
condition and/or credit standing, are determined by either the offices and/or corporate to be an unacceptable
credit risk. The exception to this is the courtesy limit of $X.
• Matching of Customer and Vendor Terms: To maximize cash flow, payment terms with Company X’s vendors
must match with the payment terms granted to Company X’s customers wherever practical. Specifically,
payments to vendors who operate in a subcontractor capacity to Company X on specific projects must not be
paid until Company X has collected the accounts receivable from its related customer. Also, whenever
extended (i.e., non-standard) terms are granted to a customer, payment terms to Company X’s vendors who
are supplying products related to such sale/contract must be extended such that the payment to the vendor is
made only after the related accounts receivable has been collected.
• For intercompany purchases, the office placing the order must notify the supplying office whenever extended
terms have been granted to an outside customer. The supplying office should, whenever practical, attempt to
extend its vendor payment terms to match those granted to the ultimate customer (particularly when products
are being purchased/produced specifically for such customers).
The extended terms request form includes a section that requests information regarding the actions taken (or to
be taken) to ensure that vendor payment terms are being matched with those granted to the customer. It is the
responsibility of the office manager to ensure that actions required to match payment terms are being
completed.

WRITTEN PURCHASE ORDERS

Unless a transaction is being prepaid, a written purchase order or contract must be obtained for new as well as
change orders. This information must be entered into the accounting system. If the order is a contract and a
purchase order number per se has not been issued, then the name of the signor should be shown first followed by
the words “contract,” “quote” and so on.

The office manager must review the customer purchase order and/or contract for non-standard payment terms,
penalty clauses or non-payment situations. After being reviewed, all purchase orders and/or contracts must be
initialed, dated and filed for future reference by the office manager.

Any discrepancies from standard terms, agreed-to terms or payment conditions stated in the Company X proposal
or general terms and conditions of sales must be immediately addressed with the customer via letter. Prior to
shipment of material or performance of any services, a written agreement from the customer removing
discrepancies from their purchase order must be obtained.

If during the project, additional work becomes necessary or is requested by the customer, a change order
referencing the original purchase order must be obtained prior to performing additional work. The change order
must be reviewed as an original purchase order as noted above.

If a debt cannot be collected due to lack of appropriate purchase order or customer authorization, the debt will be
charged against sales.

DIRECT SHIPMENTS
All direct shipment orders must be entered and processed through the accounting system prior to placing the
order with the supplier and allowing the product to be shipped. Orders for new customers must not be placed with
outside vendors until the credit department has approved the customer.
COLLECTIONS OF RECEIVABLES
Collection responsibility lies with the credit department. Office personnel must be utilized to assist with resolving
disputes regarding products and services provided. The collection of receivables will be aggressively pursued and
documented evidence of all collection activity (written and verbal) must be maintained for all customers.

As a general policy, customers with past due balances will be contacted for payment within five days from the due
date. At times (depending on dollar amounts and the customer's history with Company X) such contacts may be
made prior to the due date. The manner and frequency of contact must be determined by the amount of dollars
delinquent, with greater efforts being directed at the larger balance accounts as well as towards customers with
slow payment history. While judgment by the credit department must be used when establishing the priority and
frequency of collection contacts, the first contact for all accounts past due must be done by telephone. Follow-up
collections efforts must be determined based on the results of the previous contact. All customer contact, both
written and verbal, must be conducted professionally and courteously.

In cases where payment is being withheld due to problems that need to be addressed by Company X, the credit
department will notify the appropriate Company X personnel of the reason for non-payment and follow up
consistently until the problem is resolved and collection activity can once again be initiated.

Please Note: In the interest of maintaining excellent customer service and to project a professional image to
customers, the credit department must be notified of any issues that may cause a customer to delay payment.
The nature of the problem and a time estimate as to its resolution must also be provided. Such notifications may
be via direct contact or by placing a notation in the accounting system.

Collection of delinquent accounts must be aggressively pursued, and documented evidence of all collection
activity (written and verbal) must be maintained for all past-due customers.

All customers must receive a monthly statement of account, which will identify past due balances. Select
accounts, identified by office personnel, must be entered into the “chase letter” program within the AR system to
ensure that regular contact is maintained with all past-due customers.

All customers having balances over X days overdue, regardless of the reason why, including ability to pay, credits
due, disputed amounts or job problems, must be placed on a “credit hold” or “suspense status.” Future orders or
work will not be allowed until the reason has been resolved or without the corporate credit manager or his
designee’s approval. Orders for accounts that have exceeded their credit limit are automatically placed on “credit
hold” by the accounting system. Orders for such accounts can only be released by the credit department. At the
same time, credit department personnel must conduct an assessment of the customer’s creditworthiness and
increase the limit as needed to accommodate current and future business levels.

After all reasonable efforts have been made to collect a debt and in no case beyond X days from the due date, an
account must be brought to the corporate credit manager's attention for further action and approval to place with a
third party (attorney or collection agency). Such accounts are then sent a certified final demand letter if the debt is
over $X. A regular letter or the collection agency's own 10-day free demand form can be sent to accounts owing
less than $X. Any new orders for accounts that are placed with a third party must be on C.I.A. or C.O.D. basis and
only if the previous debt is paid in full. Offices must be notified at the time an account is sent a final demand letter
or form and when placed with a third party.

To protect Company X’s rights on jobs where there is a bond or Company X has lien rights, such accounts must
be brought to the corporate credit manager's attention at X days of when a job is completed. In certain states,
preliminary lien notices must be filed either prior to a job being started or within a limited number of days
thereafter. It is the responsibility of the offices to do so.

Any disputed items, claims or short payments identified by corporate credit must be noted and forwarded to the
appropriate office for resolution. The appropriate office must resolve the dispute within X days and advise the
appropriate collection personnel to commence collection efforts. Legitimate disputes, claims and short payments
will be coded in the accounts receivable system as disputed during the X-day resolution period. If the dispute
remains unresolved after X months, corporate accounts receivable will reverse the sale while maintaining the
receivable balance.
Prior to the acceptance of any repay programs or notes receivable, approval must be obtained from the corporate
credit manager. All repay programs must be documented and acknowledged via return mail from the customer.
The acknowledgment copy from the customer must be maintained in the customer’s credit file. Any services
performed or shipments made to a customer of a repay program must be conducted in such a manner that overall
credit exposures are reduced. A complete credit review must be conducted by the corporate credit department
prior to accepting an agreement to a repayment program and any open account sales.

Repayment and note programs that extend more than X year(s) need to be approved by corporate. Repayment
and notes programs, if accepted, should accrue interest at the rate of X% prime and when possible/practical be
collateralized.

Accounts that have been placed with a collection agency or an attorney must not have any products shipped or
services provided until the past due balance is paid and then only on a prepaid basis. Unless approved by the
credit manager and controller, accounts operating under bankruptcy are prepaid. Accounts operating under
bankruptcy and who have been granted open terms must be monitored closely; open terms that go past due will
be revoked.

BAD DEBT
Only receivables that are uncollectible due to a customer’s inability to pay, and then only after all collection efforts,
including litigation if necessary, have been exhausted, must be written off to bad debt. Amounts not being paid
because of product or service issues must be zeroed out with credits against sales. An account may not be
written off without the approval of the credit manager (up to $X), corporate controller (up to $X) and chief financial
officer (over $X).

A file of bad debt accounts must be maintained by corporate credit.

Any proceeds from accounts previously written off must be treated as a recovery and debited to cash and credited
to the reserve for bad debt.

BILLING AND CREDIT ADJUSTMENTS

The credit department is not involved in billing and issuing credit adjustments. Any questions regarding billing or
credits that are posted on an account or why bills/credit adjustments have not been issued must be addressed
with the appropriate office. All requests and appropriate paperwork to issue a credit or re-bill any items must also
to be directed to the appropriate office.
 CREDIT AND COLLECTIONS POLICY: SAMPLE 2

Prepared By:

Approved By:

Revision Date:

Effective Date:

PURPOSE

The purpose of this policy is to establish guidelines related to credit and payment collection activities, including
the use of the payment discrepancy tracker (PDT) system.

SCOPE

This policy applies to Company X employees at all locations involved in the PDT and collections processes and
related activities, including credit analysts, customer service representatives (CSRs), account managers, regional
sales managers, treasury managers, customer service supervisors and managers (CSMs), business directors, the
VP of distribution, and the VP of sales. The VP of distribution must be responsible for enforcing PDT activities and
the treasury manager must be responsible for enforcing collections activities.

POLICY

It is the policy of Company X to ensure consistency in the treatment of PDT and collections activities.

DEFINITIONS

• CSM: Customer Service Supervisors and Manager

• CSR: Customer Service Representative
• PDT: Payment Discrepancy Tracker (tracks payment discrepancies [underpayment or overpayment] and all
authorizations required to adjust accounts receivable)
• Soft Call: A courtesy call to confirm that a customer has received an invoice and to determine whether the
customer has sent the payment

PROCEDURES

PAYMENT DISCREPANCY TRACKER

A PDT is created in the PDT system when a payment discrepancy is received or an adjustment to accounts
receivable is required, which may be a result of transactions such as returns, rebills, retroactive price changes or
container deposit returns.
PDTs require varying levels of investigation and authorization prior to being cleared. Cleared PDTs signify that the
discrepancy has been resolved and the PDT is closed. A PDT can be initiated by either the credit analysts or by
the CSRs.

Upon creation, the PDTs initiated by the credit analysts must be investigated and reviewed by the CSRs for
validity. If the CSRs can’t determine the validity of the PDT, then they must escalate the PDT to the account
manager for further investigation. PDTs initiated by the CSRs do not require investigation.

If an adjustment to the customer account is required, the CSRs must create an associated credit/debit memo in
the ERP system. The PDTs must then be authorized by the CSMs or higher according to the authorized approval
level (listed in the table below). The VP of sales must authorize all PDTs about pricing issues, regardless of the
dollar amount. The following table details the authorization levels for PDT:

Title Authorized Approval Level

Customer Service Manager Up to $XXX

VP of Distribution $XXX – $XXX

Business Directors $XXX – $XXX

VP of Sales $XXX – $XXX

CFO $XXX – $XXX

CEO $XXX +

If the PDT has been authorized, the credit analysts are the only Company X employees with the ability to clear the
PDT. If the PDT is denied, the CSRs must contact the customer and notate comments in the PDT for monitoring.
Denied PDTs signify that Company X has rejected the PDT and the customer is required to pay the discrepancy.

To monitor the status of denied PDTs, sales must hold a monthly regional meeting to review denied PDTs that
have not yet been paid by the customer to determine whether they should be pursued further or closed. The VP of
sales must be responsible for approving the denied PDTs that will be closed.

The CSMs must be responsible for notating in the PDT system whether the PDT should be pursued further or
closed, along with any other relevant information. The CSMs must notify the CSRs to either re-invoice the
customer or issue a credit for PDTs that are to be closed. The PDT must be subsequently cleared by the credit
analysts. Any PDTs that the VP of sales decides to pursue further must be subject to standard collections
activities. At any time throughout the process, the PDT must be cleared upon receipt of customer payment.

COLLECTION ACTIVITY
The collection of accounts receivable is an important process in the overall revenue cycle that directly impacts
cash flow. The formal collections process occurs when a customer account becomes past due, based on the
invoice date. CSRs and credit analysts must review an accounts aging report in the ERP system every week to
identify past due accounts.

All customer accounts must be classified as either a small customer account or a large customer account,
depending on the contribution significance to total Company X accounts receivable exposure (refer to the credit
establishment and review policy 1-1000-1 and work instructions 1-1001-2 for more information).

For small customer accounts, the CSRs must place an initial soft call to the customer when the account is no
more than XX days past due. If the soft call does not resolve the issue, then the CSRs must escalate the
customer account to the regional sales manager and notify the treasury manager of the issue. The regional sales
manager should escalate the account to a higher authority if unable to resolve the issue.
For large customer accounts, the credit analysts must place a soft call prior to the payment due date. When a
customer account becomes past due, it is at the discretion of the credit analysts to determine the frequency of
customer contact. When the credit analysts have made a reasonable attempt to collect and are unable to resolve
the issue, or after the account is 60 days past due, the customer account must be escalated to the treasury
manager. The treasury manager must first validate that reasonable collection activities have been performed by
the credit analysts. It is at the discretion of the treasury manager to discuss the customer account with the CFO
for further validation. The treasury manager and CFO may determine whether to block future orders for the past-
due customer account. After validations have been completed, the past-due customer account must be escalated
to the regional sales manager, who is responsible for resolving the issue and collecting on the account.

When collection activities are unsuccessful due to bankruptcy or the inability to locate a customer, customer
accounts can be placed for collection with an outside agency with authorization from the treasury manager, or a
lawsuit can be initiated with the authorization of the CEO and legal counsel.

Full payment on invoices is expected and compromised payments are discouraged; however, the regional sales
manager may authorize compromised payments on small customer accounts and the treasury manager may
authorize compromised payments on large customer accounts if deemed necessary.