Credit Control

What is Meant by ‘Credit’?

The extension of credit in the form of a credit card is familiar to most consumers. Using one of these, a bank makes purchases on behalf of a client up to a set value. The client then repays the bank at a later, agreed-upon date. This lending of money (or something of a monetary value) on the assurance of repayment is called credit and is a crucial part of ensuring cashflow and encouraging business.

The default invoice type for B2B transactions in the UK is net 30. This means that the seller is extending credit to the customer for 30 days after the date of invoice issue. The full payment can legally be paid at any point within this window.

Having this time between purchasing a product or service and actually having to pay for it is attractive for many potential customers, especially those who do not have the immediate funds to pay upfront. However, whilst having credit extended for 30, 60, 90 or even 120 days is appealing to customers, it can cause problems for the seller if not properly managed.

What is Credit Control?

Credit control is a method of finance management important to maintaining and regulating cashflow for business. It involves the management of incoming payments; making sure all invoices are paid in full and deciding what, if any, terms of credit to extend to a client.

How Does Credit Control Work?

Credit control has two primary functions:

1. Deciding how much credit to extend to a client.
2. Ensuring that this balance is actually paid.

Like credit card applications, your track record should indicate the leniency of the terms. A client without a track record of making timely payments of credit would likely get stricter terms of credit (if any at all) than a client who does.

Both these methods encourage timely payments and are just some examples of how credit control can be applied and adapted practically and flexibly in real-life situations. It is very important that if you are going to make these additions to an invoice, the client is made aware of this at the time payment is agreed and is reiterated again on the invoice itself.

Why is Credit Control Important?

Extending credit to a client may be a good way to encourage business but also has the potential to harm your company by causing cashflow issues. The credit window in which the client must pay means you are less likely to know exactly when you will receive the funds. This wait time can be fatal to businesses who need to pay wages and utilities by certain deadlines.

Multiple pending payments from multiple sources can also be hard to keep track of, and increases the risk of invoices being paid late, or not at all.

Bad debt is one of the main reasons most small businesses fail. This refers to both the debt your company owes, and the debt owed to your company. Credit control tackles this at its root, easing cashflow both into and out of your business.

Having a good grasp of your credit control will help maintain consistent cashflow, especially as your business continues to grow. However, consistent chasing of unpaid invoices is time-consuming, difficult to keep track of, and may affect your relationship with the customer.

If you’re unable, or unwilling, to conduct this credit control yourself, and your business isn’t big enough to justify the cost of an in-house Credit Controller, it is worth considering outsourcing. Having an external company take on the responsibility of setting payment terms, collecting payments, and if necessary, issuing penalties can save you time and effort, allowing more energy to focus on other aspects of the company.

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