Credit Policy

Definition: Guidelines that spell out how to decide which customers are sold on open account,
the exact payment terms, the limits set on outstanding balances and how to deal with delinquent
accounts



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Though most consumers expect to pay cash or use a credit card when making a purchase,
commercial customers typically want to be billed for any products and services they buy. You
need to decide how much credit you're willing to extend them and under what circumstances.
There's no one-size-fits-all credit policy--your policy will be based on your particular business
and cash-flow circumstances, industry standards, current economic conditions, and the degree of
risk involved.
As you create your policy, consider the link between credit and sales. Easy credit terms can be an
excellent way to boost sales, but they can also increase losses if customers default. A typical
credit policy will address the following points:
Credit limits. You'll establish dollar figures for the amount of credit you're willing to
extend and define the parameters or circumstances.
Credit terms. If you agree to bill a customer, you need to decide when the payment will
be due. Your terms may also include early-payment discounts and late-payment penalties.
Deposits. You may require customers to pay a portion of the amount due in advance.
Credit cards and personal checks. Your bank is a good resource for credit card
merchant status and for setting policies regarding the acceptance of personal checks.
Customer information. This section should outline what you want to know about a
customer before making a credit decision. Typical points include years in business, length
of time at present location, financial data, credit rating with other vendors and credit
reporting agencies, information about the individual principals of the company, and how
much they expect to purchase from you.
Documentation. This includes credit applications, sales agreements, contracts, purchase
orders, bills of lading, delivery receipts, invoices, correspondence, and so on.
For assistance, ask your particular industry's trade or professional association for guidelines. Part
of your research should include finding out what your competitors' terms are and taking them
into consideration when determining your own requirements.
An often-overlooked element in setting a credit policy is the design of invoices and statements.
The invoice is the document that describes what the customer is being billed for; the statement is
the follow-up document that indicates the status of the account. One collection and creditor
rights expert says that invoices and statements that are clear, easy to read, and allow the customer
to quickly identify what is being billed are likely to be paid faster.
Here are several points to include on the invoice:
An invoice number
An invoice date
A customer number or other identifying code
A complete and clear description of the product or service and item numbers, if
appropriate. Avoid abbreviations your customer may not understand.
The customer's purchase order, job order or other reference information that will make
identifying the invoice easier
The total dollar amount due, clearly indicated
Payment terms and due date (and specify any early-payment incentives or late-payment
penalties).





Credit Policy
The purpose of the Credit Policy is to set out guidelines for defining and measuring the credit-
risk exposure within the Group and to assess the risk of losses associated with credit extended to
customers, financial investments and counterparty risks with respect to derivative instruments.
Each group company that extends some form of credit will have a credit policy that has been
approved by the board of directors of the respective company. The policy will be within the
framework of the LKAB Groups policy. The president of each group company is responsible for
implementing the credit policy.
Customers Credits
The granting of credit to companies outside the LKAB Group must always be based on sound
and professional credit-rating assessment of customers. Credit limits must be established for all
customers to whom credit is granted. This requires an ongoing follow-up and monitoring of each
customers financial position as well as the economic and political developments of each country
in which the group companies operate. The same rules apply to the issuing of guarantees.
The credit policy will include general terms and conditions with respect to payment, interest on
overdue payment, and any possible requirements for adequate security. The policy will also
include dunning procedures and handling of overdue receivables.
Credit approval & Limits
Each group company will have a function that is responsible for credit-risk management. Credit
limits for multinational customers that are customers to several of LKAB's group companies will
be granted and followed-up by LKAB Treasury Centre. In such cases, the granted credit limit
will apply jointly to the group companies concerned.
In its credit policy, each group company will define criteria for assessing the credit rating of new
and existing customers. The approval procedure and credit limits will also be defined.
Terms of Payment
For customers with whom formal agreements have been reached, the terms of payment will
always be stated on each invoice.
Receivables
The process for managing accounts receivable will be prioritized and responsibilities for each
activity clearly defined. The credit unit in each group company will be responsible for collection
of accounts receivable. The sales unit and credit unit will cooperate to assure and maintain
customer relations.
Reporting
Each group company will submit a monthly follow-up report to LKAB Treasury Centre. This
reporting is defined in LKABs group reporting procedures and will include the following.
Outstanding accounts receivable, where overdue receivables are stated in the month after due
date.
Average credit term
Credit losses
The ten largest customers
Financial investments
A financial investment is defined as a cash deposit in a bank or other financial institute in the
form of a direct deposit or purchase of a money-market instrument. In each case, financial
investments will be made after thorough risk assessment, and the financial investment will have
low credit risk and high liquidity. Credit limits will be established for all financial investments.
Surplus cash in hand in group companies will be deposited in the local LKAB central account. In
cases where no local central account exists, LKAB Treasury Center will give instructions as to
how cash in hand should be invested.
For procedures related to investment in financial instruments, please refer to the Policy for
Managing Financial Assets and Liabilities.
Follow-up and Control
LKAB's Vice President Treasury is responsible for the ongoing follow-up and management of
credit risks and for regular reporting to the Board of Directors of LKAB.