Controlling customer credit
Finance & Funding
Key learnings
- Extending credit to your customers can be a great way to increase sales and grow your business – but it also carries risks.
- Having an effective credit control process in place can help you ensure you’re offering credit to customers who are likely to pay you back in full and on time.
- Credit insurance can provide cover in the event of a late or nonpayment.
Extending credit to your customers can be a great way to boost sales and relationships but it needs to be managed carefully so you don't lose out in the long term. Here are the main things to think about when creating credit control processes.
Credit control is the process of selling goods or services to a customer through the extension of credit.
Extending credit to your customers can be a risk – but often a necessary one. Offering credit can be a great way to boost sales, strengthen customer relationships and match your competitors. It essentially makes it easier for your prospective customers to buy from you – and more sales mean more profit. But, selling to customers through credit can negatively affect your cash flow and if not effectively managed, late or absent payments could be detrimental to your business.
Why is credit control important?
Cash flow is the lifeblood of your business and keeping it positive relies on money coming in. Therefore, late or absent payments can massively impact your cash flow, and ultimately put your business in bad debt.
Chasing unpaid invoices and collecting debt can waste valuable time and damage the relationships you’ve built with your customers.
Implementing an effective credit control process will help mitigate risk and any potential damage by establishing the cash-worthiness of customers before you sell to them through credit.
Click below to find out how you create a credit control process...
1
Define your credit period
When creating a credit control process, the first thing you should do is work out how long your credit period will be. A credit period is the amount of time you will give your customer to pay you for the goods or services you have provided them with.
Carry out some research and determine the standard credit periods for the business sector you’re operating within. It’s also important to base the length of your credit period around how quickly you need to pay your overheads and suppliers.
2
Statement of credit terms
Once you’ve defined your credit period, put together a clear statement of your credit terms that you’ll provide customers with should they apply for credit. Your credit terms should be clear, accurate, and included in all of your order forms, invoices, financial documents and on your business website (if you have one).
3
Credit application form
Next, put together a credit application form. This will be used to collect important customer information, such as:
- Business name
- Contact name
- Address
- Contact info
- Bank account and sort-code
If you’re just starting out, it’s a good idea to limit customer credit to amounts you can afford to finance in the event of nonpayment.
4
Check customer credit
The best way you can avoid extending credit to potential late payers is by checking the credit history of your prospective customers. You can do this by signing up to a credit report agency like Experian, Creditsafe or Equifax. You will need to pay for these credit reports, but the fee is well worth it to protect your cash flow and, ultimately, your business. Remember, credit checking doesn’t offer a 100% guarantee, but it will help you make more informed choices when it comes to providing credit.
Once you’ve deemed a customer creditworthy, it’s worth taking the time to discuss the payment process with them. Make sure they are comfortable with the situation and confident they can make the due payment date.
5
Prompt invoice
After you’ve made the sale, invoice your customer quickly and accurately. It’s a good idea to send the invoice to your customer as soon as the orders are complete.
Keeping clear and open communication throughout the process is key. You might want to give your customer a polite call to check they received the invoice and that everything was in order.
6
Send payment reminders
Send your customers gentle payment reminders every week the invoice remains unpaid.
7
Encourage early payments
Consider offering discount or rewards for customers who settle their payment before its due date. Not only will this build customer loyalty, but it will also benefit your cash flow.
8
Pain-free payment
Make the payment process as easy as possible for your customer by accepting cash, credit/debit cards, BACS and cheques.
9
Keep track of your cash flow
Forecasting isn't a fail-safe, but it will offer an approximate gauge of predicted turnover so you can estimate how much cash will be needed to account for predicted debts.
Your cash flow forecast should be a working document so keep it updated and remember to trust your business instinct.
10
Monitor late payers
If a customer consistently pays late, you should review your relationship with them. Consider whether it is worth continuing to offer late-paying customers credit.
11
What to do if a customer doesn’t pay
If invoices remain unpaid and a customer continues to ignore your payment prompts, it might be time to speak to a legal professional.
Getting paid for the services or goods you’ve provided is a critical part of running a business.
Check out the steps you should take if a customer doesn’t pay in UMi’s guide to late payments.
Credit insurance
Another way to minimise the risk of extending credit to customers is to purchase credit insurance. Credit insurance will provide cover for your business if a customer you’ve sold to fails to pay on time. There are different types of credit insurance you can purchase - each offering a different level of cover. You can read more about credit insurance here.
Invoice finance
If an overdue payment is damaging your cash flow, another option you have is invoice finance. This is a quick way to access capital to improve your cash flow by releasing money from unpaid invoices. Check out this guide from Funding Options by Tide.
Next steps...
- Take some time to establish a credit period that works for your business, as well as your prospective customers.
- Put together a statement of credit and make sure it is included on any invoices and order forms of financial documents.
- Check out the customer credit services offered by Experian, Creditsafe and Equifax.
- Prepare yourself for potential late payments with UMi’s guide to late payments.