How Credit Control Helps Protect Your Business When Giving Credit To Customers

Offering credit to customers is a powerful way to boost sales and build strong relationships. However, businesses always risk suffering if customers are late paying or, worse still, refuse to pay at all. 

This is where credit control comes in. It’s a business system that helps protect your business when giving credit to customers so that on sale – all funds are released when they should. In this post, we’ll go into more detail about what a credit control system is, its benefits, and when small businesses should be using them to safeguard their company. 

However, it also introduces the risk of late payments or even bad debts. That’s where credit control comes in. This blog post will explore how a robust credit control system can safeguard your business by minimizing financial risks and ensuring a healthy cash flow.

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The credit control process

The credit control process is all about ensuring that credit agreements are made with the right customers who can be trusted to pay on time. 

Imagine one of your friends is asking you to lend them money. There are steps here before you can say yes – first, you’ll want to see if you’re actually okay to lend them the money. Then, you need to decide how much you’re comfortable lending them – and when you’ll get paid back. Provided those two steps are okay, you’ll finally hand over the cash.

The credit control process works in a similar way, with 3 distinct stages: 

• Credit approval (getting the okay to lend money)
• Limit approval (deciding how much you’re comfortable lending)
• Dispatch approvals (handing over the cash). 

In practice, the customer will start this process by making an application for credit. Then, it is the finance department’s responsibility to review the request and decide whether to grant or reject it.

Without the credit control system, your business could end up giving credit to people who can’t or won’t pay, leading to serious cash flow problems. It’s about being smart with your money and avoiding risky “loans” to unreliable customers.

The 4 benefits of using credit control 

So why implement credit control? These are the top four ways your business can benefit from credit control. 

1. Credit control helps liquidity

Let’s face it: small businesses can’t always turn their stock into cash overnight. 

Offering credit can be a risk, but it also spurs sales and can help you maintain a steady cash flow to keep your business liquid. 

2. Credit control improves accountability

Nobody wants to spend their time chasing after unpaid invoices. 

Debt collection is a real headache—it’s time-consuming, expensive, and can lead to big losses if customers default. We’ve all heard stories of small businesses going under because of bad debts.

On the flip side, strong cash flow management ensures you always have the funds you need to operate. That’s why credit control is so crucial, especially for UK manufacturers. It not only helps you avoid debt collection headaches but can also build customer loyalty and even help you break into new, competitive markets.

3. Credit control helps identify ‘good’ customers

Do you know which of your customers are ‘good’ customers?

We don’t mean which are most likely to put in an order or which ones spend the most (though these can also be important!).

We mean understanding which customers are least likely to fall behind in repaying their credit. Or, better yet, which customers repay their credit ahead of time.

Only with a good credit control system in place can you really start to get a picture of who your best customers are in terms of credit.

Once you have a better picture you can ensure you focus more time on growing relationships with these customers. After all, a fast-paying customer helps improve your cash flow and is, therefore, someone you want to do as much business with as possible!

While you may still wish to accept orders from a customer who doesn’t easily keep to the payment terms, you may be less likely to accept larger orders. You may also be able to better plan for when the money is likely to hit if you know, in advance, that the payment deadline may not be met.

4. Credit control helps future planning

We touched on it in the last section but good credit control procedures also help you plan for the future.

If you know that customer X owes £1000 but is usually late in paying money owed, whereas customer Y owes £500 but always pays early, it can help you better predict when money will be in your account.

That then allows you to create better forecasts and plan for ordering more stock or even knowing when to pay your own bills and outstanding invoices.

5 times small business might need a credit control system 

Now that we’ve explored some of the benefits, let’s explore the exact reasons and times when small businesses would benefit from using a credit control system. 

1. If you’re offering any credit terms to customers 

If you allow customers to pay after receiving your goods or services, a credit control system is essential to manage the risk of late or non-payments. Basically, if you offer any sort of credit, a credit control system is essential. 

2. If you’ve experienced late payments or bad debts 

If you’ve encountered customers who pay late or not at all, a credit control system can help mitigate these issues and safeguard your business in the process. 

3. If you’re rapidly growing or expanding your business 

As your business expands, the volume of transactions and the complexity of managing customer accounts increase. A credit control system can help streamline these processes and help maintain a steady cash flow throughout your growth. 

4. If you operate in an industry with extended payment terms

Some industries have standard payment terms that are longer than others. If you operate in such an industry, like the construction industry, a credit control system can help you manage your cash flow effectively.

5. If you want to improve your cash flow

 A well-implemented credit control system can help ensure timely payments, leading to improved cash flow and financial stability.

Implementing a credit control system

We’ll be the first to admit it. Credit control isn’t exactly the most exciting function of a business.

For one, it can be really awkward setting terms and then chasing payments. No one likes asking for money even when it is rightfully owed to you.

However, credit control isn’t just a necessary evil, it’s essential for the long-term health of your company.

But, it isn’t something you necessarily have to do yourself. Nor do you need to hire an employee to do it for you.

Many people choose to outsource their credit control to external providers. This offers numerous advantages:

• You can focus on growing your business instead of chasing money owed
• You avoid the awkwardness of having to ask people for money
• Customers are less likely to hold you responsible for the regular emails and calls
• You get some form of reassurance that funds will be available when you need them
• The people doing the chasing are likely to be more skilled in chasing and persuading

So, you can see why outsourced credit control is very appealling, especially for small business who, quite frankly, have better things to be doing!

Another benefit of outsourcing is that you can get the help needed to implement the correct credit control procedures in the first place.

A 3rd party is less emotionally involved and therefore, more likely to make rational decisions based on facts. As a human being, it’s only natural that you might want to extend better terms to customers you like, and stricter terms to customers you don’t.

But this approach is flawed and destined to fail. Outsourcing credit control mostly removes this human flaw that exists in us all as the people dealing with it do not know the customers personally. They can only make their decisions based on what they see on paper.