Credit Control for New & Small Businesses

The new small business owner might get tired of hearing about it, but should never get bored of putting it into practice: credit control. It’s absolutely vital and can make the difference, especially in the early years, between getting by and getting on.

There are myths and much bad practice out there – so what is it, exactly? Credit control is the process by which your business can ensure that you only give credit to customers or clients who are able to pay you back – and that when they do pay you, they do so on time. The term ‘credit’ can apply to a financial sum or any product or service that you provide up front before payment is given. That’s crucial: credit may be the goods you sell or the time you give a customer, if payment is not immediate.

The credit control process can be split into two main areas. The first is how you decide or ‘control’ who you give credit to in the first place, and the second is how you then collect the debt.

Why is credit control important?

Both aspects of credit control are vital. Being able to identify customers who are more likely to be able to pay you back reduces the risk of non-payment. Robust debt collection processes help to ensure that when you do have problems getting people to pay, you have a much higher chance of success.

Non-payment causes cash flow problems in your business which can escalate quickly, so putting credit control in place helps you to minimise any risk to your business. When you can’t pay your own bills, your own creditors, life gets tough. The way to avoid this is to learn about your customers.

The credit control process begins before the sale is made. This is the point where you should find out as much relevant information as possible about your customer. The more you know, the more informed your decision to give credit will be. More detail at this point can also make any later debt collection easier – should it come to that.

The two key ways you can use to learn about your customer is through an application form and a credit check. A credit check will allow you to view your customer’s credit report and so to see their previous behaviour when it comes to paying their lenders – it helps you decide if you’re comfortable with the customer as a ‘risk’.

It’s possible to not only check a consumer for credit, but also a business. And any business can build up its own information on existing customers to help future decision-making. If you have customers with a history of non-payment then ensure there is a process in place to record this to prevent it happening again.

Top tips for credit control

Formalise the process: Once you have the above information, you can use it to decide how much credit you are prepared to give and in what time you would like it paid back. Make sure these terms are agreed and formalised up front.

Invoice promptly: Once the sale is made then you must send your invoice promptly if you expect to receive payment speedily. Make sure it is accurate (to avoid administrative delays) and make sure that your payment terms are clearly laid out to avoid confusion. Not all businesses offer the same terms, so make it clear what yours are. Also, at this stage, you should advise your customer of what your debt collection process will be should they fail to meet their payment date.

Make it as easy as possible: The more automated you can make your payment systems, the easier it will be for customers. For example, rather than expecting them to send you a cheque, give them the functionality to pay you online. You might even want to go an extra step and put incentives in place for customers to pay you early. The idea that a customer might be getting a discount is in itself a powerful incentive.

Maintain good relationships: By staying on good terms with clients and customers they are more likely to prioritise your business for payment because they will want to keep the option open to do business with you again in the future.

And finally, once customers have paid you – thanking them for paying you on time is likely to encourage them to do so again! There is no mystery to credit control, but there should definitely be an automated, rigorous and repeatable process that lets customers and partners know where they stand – and lets you get paid on time.

Further resources and advice for SMEs is available from Experian’s website.

By Ade Potts, Experian.

This article appeared on Business Zone.