Credit Control Guide
For the majority of small businesses, revenue isn’t always acquired at point of sale. That’s true both for service-based SMEs that take on different clients, and the large number of companies that allow customers to acquire products now and pay later.
How, then, can these small businesses ensure that any outstanding invoices are actually paid by their customers or clients? Who is responsible for chasing up customers to make sure payments are made?
These are exactly the questions we’ll answer in this article, as we take a look at what credit control means to SMEs.
What is credit control?
Credit control describes the process of ensuring that a business’ customers or clients pay their debts. It’s typically managed by the financial lead within an SME (perhaps that’s the Head of Finance), or potentially by an entire department in larger businesses.
There’s a lot more to credit control than simply checking bills are paid. In fact, risk assessments are a huge focus for teams managing this process. Credit controllers will typically perform background checks on potential clients, gauge their perceived ability to repay future debts, and use the information they collect to decide on which credit terms the business is comfortable offering to potential customers or clients.
Let’s explore the key elements of a credit control process.
The credit control process within a small business
While processes may vary from business-to-business, the key elements of any credit control process include:
Storing client or customer data
Naturally, businesses who offer credit will need to store data regarding their customers. This may include financial data that helps facilitate payments, and general company information such as who is the point of contact for each party. Data stored may be subject to various laws, such as GDPR, that affect how databases are maintained.
Performing credit checks
Within a b2b scenario, the credit controller will often conduct a formal interview with customers to ask crucial questions that help inform their risk assessment. Some modern solutions to credit control may attempt to automate this process to a certain extent, and so gauging how exactly this should look for an SME can vary case-to-case.
Setting credit terms
Having conducted a risk assessment, the credit controller must make a decision on to which customers/clients they’re willing to offer credit. Understanding the business’ cash flow requirements will help them quantify how much money can be lent, which determines how many clients the business approaches with a credit offer.
The exact nature of that offer must also be detailed, which may be as simple as setting a credit limit that states how much money the business is willing to offer as a debt, and the setting repayment terms - including firm repayment deadlines and outlining conditions for when repayments are not made.
Recording and managing unpaid invoices
Things can get tricky when invoices are not paid in a timely fashion, so the credit controller will often work in conjunction with the legal advisor or expert within an SME to handle any issues that arise. The tracking and admin work associated with unpaid invoices is part of the day-to-day job of a credit control team.
Communicating with clients or customers to collect payments
Whenever payments are involved, keeping a dated log of any discussions had with customers is crucial. Putting a good process in place for logging and recording conversations can make it easier to settle legal disputes easier in future, and help the credit control team continue their operations if there’s a change in staff.
SMEs may also benefit from formalising their process of contacting customers. That includes determining which channels of communication to use. Popular channels include:
- Emails.
- Phone calls.
- Letters.
And some businesses may even use social media to communicate with customers, or to pass queries over to the credit control team.
Understanding the business’ capacity to manage credit control also matters. That means gauging how many members of the team are there, how much time can be dedicated to chasing repayments, and identifying the needs of your clients. These factors may determine which of these channels prove to be the most practical option.
Business-as-usual credit control duties
One additional duty of the credit controller is to answer any internal or external queries if, for example, a customer needs more information concerning their unpaid invoices.
There’s also typically a reporting function within credit control to help business leaders get an overview of how much debt the business currently has. This can, in turn, influence the credit appetite of the business going forward.
Is offering credit a viable option for my business?
That’s a decision that only you, as a business leader, can make. That said, it’s worth acknowledging some of the potential advantages of offering credit, which include:
- Improving your ability to drive sales by making products and services more affordable. Many clients or customers may find themselves in need of your offering, but unable to pay up front – and so credit may help you secure that sale.
- Improve your competitiveness. Following on from the above, offering a greater range of payment options to your customers and being more flexible in that department could help you edge out over competitors.
The downside? You allow customers to take on debt, creating a potential risk of missed repayments, which could affect your revenues.
Making a decision on whether to offer credit can directly impact the external sources of business finance you choose to use. For example, if you’d prefer to outsource the control of your credit to an external party, an invoice factoring solution may work for you.
If, though, it would suit you better to retain control over your credit and manage your own invoices, you may be interested in the innovative invoice financing solution we, at Rapid Cash, offer - which you can learn more about by visiting our home page.
