A Credit Policy is a set of guidelines that a business uses to determine how it extends credit to customers. This policy outlines the criteria for evaluating creditworthiness, such as credit scores, payment history, and income levels. It helps businesses manage risk by ensuring that they only lend to customers who are likely to repay their debts. Additionally, a well-defined credit policy can improve cash flow and reduce bad debts. By establishing clear terms for payment, interest rates, and credit limits, businesses can maintain healthy financial practices while fostering customer relationships. This policy is essential for both small businesses and large corporations.