As a small business owner, you are likely to have heard of the concept of credit control. Credit control can help make your business's services or sales more attractive, but a lot of people may not fully understand how it works. This is why we've compiled this short guide to what credit control is, using it in your business, why it is important, and what you should consider when creating your credit policy.
Credit Control Definition
Credit control, sometimes referred to as credit management, refers to a system used by companies to ensure credit is only given to customers likely to repay. It is the practice of ensuring your clients pay you within a reasonable amount of time for any goods or services provided. In business, this also refers to strategies that use the extension of credit to potential clients to improve their sales. The amount of credit extended to a customer usually depends on their credit rating - poor credit history can indicate a risk of a customer not repaying which can, in turn, lead to cash flow problems for your company.
This can be a valuable practice for customers hesitant to spend a large sum of money on your product or services. Just like an electronics store might offer the option of paying installments for a TV, a business can make similar offers to make their goods or services more attractive to the purchaser. Even if it makes the buyer's overall cost more expensive in the long run, the credit agreement might make the purchase more manageable.
Should My Business Use Credit Control?
Accelerating your company's sales will typically lead to bigger profits which can, for example, boost stock prices. When making a sale, a big factor will be how attractive and feasible the investment in your product or service is to a potential customer. This is where effective credit control can be helpful - offering attractive payment terms can improve customers' willingness to buy. No matter what you are selling, the easier you can make it for customers to buy your goods or services, the higher the chance your customers will purchase.
Two examples of credit control are 'buy now, pay later' payment terms or subscriptions. Even offering a slight discount for a guaranteed period of service can be a form of credit control.
Why Is Credit Control Important?
There are some things your business cannot control - the state of the economy, pandemics, etc. However, there are factors that you can influence in your business's favor, such as marketing, sales price, or even the quality of your goods or service.
Another factor you can influence by extending credit is the ability of your potential customers to invest in your product or services. A credit policy means you are offering more options to your customers to pay for your product which will lead to increased profits. This not only makes it easier for them to physically commit to spending money with you, but it is likely to improve your brand image which can be equally important to some consumers.
What Do I Need To Factor Into My Credit Policy?
- Credit standards: Before you e extend credit, you need to understand the risk. Analyzing and understanding the credit history of your customers will be key. Someone with ‘good’ credit will come with lower risk, but extending to potential clients with ‘poor’ credit could lead to bad debt. When extending credit to customers, ensure it is the right one.
- Credit period: Deciding on how long you will give your customers to pay is key. This can considerably impact your company's cash flow and financial planning.
- Discounts: A way to encourage early repayments is to create incentives such as discounts. This can help your debts be paid faster.
- Collection policy: Establishing a clear set of rules and procedures in case of late payments is crucial. This not only incentivizes customers to not pay late but also gives you a clear roadmap.
- Credit limits: You could consider establishing credit limits to ensure that your business is not lending more than it can. Identify a maximum outstanding amount and break that down depending on how many customers you are extending credit to.
- Regular reviews: Ensure you or your team review the outstanding extended credits to your customers regularly. This makes it harder for you to miss outstanding debts.
Credit Control Process & Procedures
When establishing credit control in your business, there is several good practice procedures and processes to be followed, including:
- Ensure you have the correct customer info to ensure you are correctly identifying those with a strong credit history and those likely to cause bad debts.
- Run credit and finance checks on new customers to ensure you have the most up-to-date knowledge.
- Determine how much capital you can safely extend as credit and establish credit limits based on this.
- Ensure your staff is familiar with your credit control policy.
- Create a credit policy with clear debt collection processes.
- Consider getting guarantees from customers with bad credit history.
Credit Policy FAQs
- What are the types of credit control?
A business can decide on the type of credit control it establishes: It can either go for a restrictive, moderate, or liberal credit control policy. While a restrictive policy is a low-risk strategy, moderate presents a middle-of-the-road risk, and a liberal credit control policy is a high-risk strategy in which the business tends to extend credit to the majority of its clients.