Credit control is the process a business uses to ensure that it gets paid for the goods or services it provides. It involves setting credit limits, monitoring customer payments, and taking action to recover any outstanding debts.
Why is credit control important for small businesses?
- Increased profitability: Credit control can boost a business’s profitability by reducing bad debts and improving cash flow. This can free up funds for reinvestment and growth, leading to greater success in the long term.
- Improved cash flow: Small businesses often face cash flow problems, so late payments can significantly affect their ability to pay bills and invest in growth. An effective credit control process helps to ensure that invoices are paid on time, improving cash flow and reducing the risk of financial difficulties.
- Reduced bad debts: By carefully assessing customers’ creditworthiness and monitoring their payment history, businesses can reduce the risk of bad debts, saving them significant amounts of money in the long run.
- Stronger customer relationships: Good credit control doesn’t have to involve aggressive debt collection. Businesses can build stronger relationships and improve customer satisfaction by clearly communicating payment terms with customers and offering support when needed.
- Better planning and forecasting: Effective credit control gives businesses a clearer picture of their future income, making it easier to plan and forecast. This can help them to make informed decisions about investments, staffing, and other essential matters.
More businesses rely on accounting software for credit control, as it can send automatic reminders and statements. If you don’t have time to complete credit control, you can outsource it to an agency. However, remember that outsourced credit control will incur fees and expenses for the business.
Disclosure: This content may contain affiliate links, which means if you click on them, I may get a commission (without any extra cost to you).
Credit Control Policy
A Credit control policy is vital for a successful business because it helps ensure customers pay on time and in full. Companies can minimise the risk of late or unpaid invoices by setting clear terms and conditions. In addition, a credit control policy can help businesses improve their cash flow and better manage their budget. By having a clear policy in place, companies can reduce the chances of financial difficulties in the future.
Everyone in the business who deals with customers must understand and apply the credit control policies. This includes salespeople, who initiate contact with the client, and accounting staff, who oversee debt collection.
What Should be Included in Credit Control Policies?
The contents of a credit control policy will depend on the size and needs of the business. However, most policies should cover the following areas:
Set Clear Terms and Conditions for Customers
Setting clear terms and conditions from the outset is essential when extending credit to customers. This helps avoid misunderstandings later. Ensure that the payment terms or credit period are clear. Early payment incentives can be a great way to encourage customers to settle their invoices promptly.
However, it would be best to also make it clear what the consequences of late payment would be. This could include charging interest, imposing additional fees, or suspending credit facilities. By clearly setting out your terms and conditions, you can help ensure that you and your customers are on the same page.
Assess Customer Credit Risk
Credit risk is the possibility that a customer will pay late or fail to pay what they owe. Before offering credit, a business should assess whether the customer is likely to meet the agreed payment terms.
This may include reviewing the customer’s credit history, checking information held at Companies House and requesting references from other suppliers. Existing customers should also be monitored for changes in their payment patterns, such as increasingly late payments or repeatedly exceeding their credit limit.
The level of credit offered should reflect the risk involved. A business may reduce the credit limit, request a deposit or require payment in advance if there are concerns about a customer’s ability to pay.
Set Credit Limits
A credit limit is the maximum amount a customer can owe at any one time. Limits should reflect the customer’s financial position, payment history and the level of risk the business is willing to accept. Review them regularly and reduce or withdraw them if payments are repeatedly late.
Monitor Customer Account Activity
Part of good credit management is regularly monitoring customer account activity. This includes tracking outstanding invoices and upcoming payments. By periodically monitoring customer accounts, businesses can quickly identify potential problems and take action to resolve them.
Implement a Debt Collection Process
If customers pay late, it is crucial to have a credit management process in place. This process should be fair but firm and carried out professionally. The aim is to collect the outstanding debt without damaging the customer’s relationship.
Businesses can use several debt collection methods, including sending reminder letters, making phone calls, or speaking to the customer in person. The ultimate goal is to expedite debt collection while preserving positive customer relationships.
Educate Staff about the Credit Control Policy
Everyone in the business must understand the credit control policy and how it works, especially a credit controller. This includes sales staff, customer service staff and accounting staff. By educating staff about the credit control policy, businesses can help ensure it is consistently implemented.
Complete a Credit Check on the Company
Before you offer a new client credit, it is worth checking if they have a good credit rating. Several companies offer this service for a small charge. Experian offers business credit checks and a free trial.
Many businesses request that you complete a credit application form. This form will require information on business details, the contact person, where to send invoices, bank details, and two trade references. Ensure you request the references; they are the best people to know the business and whether it is worth offering credit.
Make sure you agree to a credit limit and payment terms. If these terms are not kept, you may need to reduce or remove the credit account. A business with a poor credit rating can be worse than not having a customer.
Credit Control Process
The credit control process begins before offering a customer credit. The business should assess the customer’s ability to pay, agree on an appropriate credit limit and clearly explain the payment terms.
Once a sale is made, the invoice should be issued promptly and include the correct due date and payment details. Outstanding invoices should then be monitored regularly using an aged debtors report.
If an invoice becomes overdue, the business should contact the customer, send a statement or payment reminder and resolve any queries that may be delaying payment. Further action may include a formal debt collection letter, charging interest or beginning legal proceedings.
Following a consistent process helps the business collect payments sooner, reduce bad debts and protect its cash flow. See our guide to credit control procedures for the detailed steps to follow.
Cash Discounts
Some businesses may offer a cash discount for early payment, typically 2%. This encourages customers to pay on time. The customer will need to know that the discount is available and the date by which they need to make the payment; this can save a lot of time for credit control.
Late Payments
Late payments are a massive problem for small businesses; they can cause severe cash flow problems.
If payments are continually late, review the credit terms you agreed with the customer; sometimes, you must withdraw credit completely or request a deposit.
Who Is Responsible for Credit Control?
In a small business, credit control may be managed by the owner, bookkeeper or another member of the accounts team. Larger businesses may employ a dedicated credit controller to monitor customer accounts and follow up on overdue invoices.
Other employees also have a role. Sales staff should agree appropriate payment terms before accepting an order, while the person responsible for invoicing must ensure invoices are accurate and issued promptly. Everyone involved should understand the credit control policy and apply it consistently.
Debt Collection Agency
A business may consider using a debt collection agency when a customer repeatedly ignores payment requests or a significant debt remains outstanding. An agency can save time and provide specialist support, although its fees will reduce the amount recovered.
Before appointing an agency, check its reputation, experience and approach to dealing with customers. The business should also provide accurate records of the debt, including invoices, statements, agreed payment terms and previous correspondence.
What is Credit Control Conclusion
Effective credit control helps a business get paid on time, maintain a healthy cash flow and reduce the risk of bad debts. It starts with assessing customers carefully, setting suitable credit limits and agreeing clear payment terms.
A written credit control policy ensures everyone follows the same approach when offering credit, monitoring accounts and dealing with late payments. Regularly reviewing the policy allows the business to respond when a customer’s circumstances or payment behaviour changes.
For the practical steps involved in collecting payments, see our guide to the credit control process.
