Credit control – how to protect your finances

It's not always easy to solve financial challenges for small business owners, but there are strategies to be better prepared for them. An effective credit control process can help small business owners protect their cash flow, plus reduce late payments and fraud.

From assessing clients' creditworthiness, setting up credit limits, and implementing a late payment strategy – find out how credit control can protect your business’s finances.

What is credit control?

Credit control is the process of managing the ‘credit’ you’ve given to a customer. This means that anytime you’ve set up for a payment to be taken at a later date, you’ve given credit to someone.

The techniques used to make sure you receive what you’re owed on time, is credit control.

These techniques include:

• setting clear payment terms
• assessing creditworthiness
• setting clear credit limits
• invoicing effectively
• having a clear late payment strategy

Effective credit control can help small businesses with their finances by reducing the risk of debt and improving cash flow.

Here are some strategies small businesses can adopt to control their credit.

Clear payment terms

Payment terms are the conditions a business sets around how and when it will be paid for a service or product it’s provided. Payment terms should be communicated to the customer as early as possible and be included clearly in your invoice.

Our guide to writing an invoice covers all the details you can include in your payment terms but these are a good place to start:

• payment due date
• payment method
• late payment fees and penalties
• payment schedule

When setting your payment terms, make sure the repayment schedule is reasonable. The length of repayment terms varies between industries.

Food industries, for example, have shorter terms, usually from 7 to 30 days. While construction work can be up to 90 days because the jobs usually take much longer.

Sometimes you’ll see the term ‘Net 30’ on an invoice, which means that payment is due within 30 calendar days from when the invoice was issued.

As long as the repayment schedule is clearly stated on the invoice, you can choose whatever length you feel is appropriate.

Creditworthiness of customers

Small businesses can rely on the strength of their relationships with customers and suppliers. But doing your due diligence at the beginning of a new working relationship is an important part of credit control.

Checking the credit score of a new business relationship can be a sensible idea. If you’re supplying a local restaurant with food items, for example, taking the time to check their credit score before you share your produce can simplify things.

By doing this, you can get a good idea of whether or not a new business is reliable when it comes to repayment. Although there’s usually a cost involved to complete a credit check on a business, it might be worth pursuing.

And at a smaller scale, if you’re a tradesperson beginning a job for a new client, starting off small with payments can help assess whether a customer is trustworthy. For example, you could structure the payment terms so half of the money is paid up front as a good alternative.

Use credit limits

A credit limit is the maximum amount you’re willing to credit to a customer. The maximum can be a flat rate for all customers or be adaptive to your circumstances.

For example, if you’re working with a customer that’s slow to repay, giving them a lower credit limit means the amount you’re owed is smaller.

Or if you’re struggling with your cash flow, lowering the credit limit can help you manage it in the future.

When setting credit limits, try to keep in mind both your immediate and longer term needs as a business.

Invoice promptly

Getting into the habit of sending invoices quickly after a sale can be a useful credit control strategy. Sending an invoice promptly can help:

• keep cash flow steady
• build a reliable working relationship
• increase the likelihood of being paid on time
• keep on track with your bookkeeping

Follow up on late payments

It can be difficult for small business owners to approach an overdue payment. Relationships are an important part of a business's success and it can be hard to strike the balance between being firm and friendly.

Our guide on how to write a late payment letter features a template that’ll make the task a little easier.

In the article we cover:

• when a payment is considered late
• when to send a late payment letter the features of a late payment letter
• what the law says about late payment

Late payments are unfortunately an inevitable challenge of running a small business. Making sure you have a strategy in place for when they happen can help minimise their impact on your cash flow.

More useful articles for small business owners

• How to tell your customers about a price increase
• Best business savings account
• How to reduce waste in your small business
• What type of business insurance do you need?

Do you have issues with late payment? Let us know in the comments below.