What Is a Collection Policy?

A collection policy is a set of business practices and procedures that outline the way a company goes about collecting money owed to it as a result of an extension of credit. Companies often allow their best business customers to establish payment terms that give the customer an extended amount of time, such as 30, 60 or 90 days, to pay an outstanding invoice. Other companies extend credit to individual consumers and implement a collection policy to control the process of obtaining payment on the credit account.

Companies build their businesses by developing relationships with their customers. One of the ways to build a relationship is to allow customers to take goods when needed but pay for them later. This extension of credit enables business customers to manage their cash flow by giving them time to resell product before having to pay the supplier.

Credit extensions allow individual consumers to obtain needed merchandise upfront but pay for purchase over time. In the case of business-to-business transactions, the extension of credit is carried on the supplier's book under accounts receivable. Extensions of consumer credit are typically carried on the books under a separate consumer credit category that is also a type of receivable.

Accounts receivable is a company's list of outstanding extensions of credit to customers. The company's collection policy establishes how the accounts receivable or collections department should go about reminding customers that payments are due and how the department should handle delinquent accounts, or accounts that are not paid as agreed. This policy is critical to a company's relationship with its customers. A relationship can be irreparably damaged by miscommunication about amounts owed or aggressive collection tactics, undermining the goodwill that was generated by the initial extension of credit.

Typically, a collection policy is comprised of a set of rules that govern the acceptable actions by people assigned to work to collect payments on credit extensions. The policy addresses issues such as when and how to contact customers, when to place a hold on an account, how to resolve payment disputes and when to send an account to an outside collections agency. Establishing a collection policy makes the process consistent and fair. If an account is delinquent and requires more aggressive tactics, such as suspending a customer's buying privileges, the existence of a collection policy ensures that the customer is treated in the same way as any other customer under the same circumstances.