A complete guide to credit control

When billing other businesses, it’s common practice for invoices to be raised and payment terms set. The most effective way of establishing whether another business is likely to pay you on time is through a robust credit control process. When managed effectively it can mean the difference between success and failure for a business of any size. As well as helping to guarantee payment for your company, a good credit control system can also bring additional pay offs such as maintaining good client relationships, as well as the reputation of your business.

While it’s a core element of running a business, collecting payments from customers on time is often one of the biggest challenges faced by owners and their financial teams. In this guide we’ll explain exactly what a good credit policy looks like, with plenty of tips and wider considerations.

What is credit control?

Credit control is the process of checking customers or suppliers to determine their credit ‘worthiness’ i.e. whether they’re likely to pay you on time. It also refers to any measures or strategy a business puts in place – such as payment plans or calculating risk – in order to manage and maintain the waiting time between when a service is given or a customer is supplied, and when the business gets paid.

The term ‘credit’ can apply to a financial sum or any product or service that you provide up front before payment is given. Not limited to only credit card providers or banks, any business of any size that delivers goods or a service before payment can and should have a system for credit management in place. This includes running business credit checks, which we discuss further in this article.

Why is credit control important?

Without a robust credit management system, your business’ cash flow could suffer. Get it right, and you’ll enjoy a seamless process where customers pay invoices on time and you gain certainty on cash flow. As well as keeping your business running, being able to understand your finances is also essential to identify new opportunities and areas for growth.

Failing to use credit control measures could put the financial health of your business at risk, reducing your company credit score and preventing access to critical finance or client opportunities. Read our guide to learn more about why business credit is important and how you can improve your own business credit score.

When poor credit control processes lead to cash flow issues, it can be difficult to pay suppliers, overheads and sometimes, employee wages. Over time, repeatedly extending large credit limits to customers who fail to meet payment deadlines could put a business seriously at risk, even resulting in liquidation.

How to identify credit risk

Before entering into any contract it’s crucial to undertake prior research to make sure your new customer or client is reliable. Entering into a formal contract or financial relationship without due diligence could lead to problems in the future. Always run a credit check beforehand to identify any potential risk and reduce any uncertainties, especially if you’re offering high credit limits and extended payment terms.

A credit report gives you a clear understanding of previous payment patterns, helping you to determine a customer’s credit worthiness to draw up suitable payment terms and conditions for a contract. If there are no red flags, like a low business credit score or County Court Judgments (CCJs), you should be able to enter into a contract with confidence. Any issues, like a low business credit score, doesn’t necessarily mean writing off a customer – but you may want to ask for partial or upfront payment before completing any work.

Tools such as Experian Business Express were developed for this purpose. Using a powerful database, it can objectively report on the true credit status of any business. Additional functionalities such as the identity verification check provides confidence that a customer is who they say they are, by conducting searches on the directors at the business.

Six simple credit control tips

As well as credit checking new customers, there are a number of other steps you can take to improve your credit control processes and protect cash flow.

Check your sales ledger regularly

Your sales ledger should always be kept up-to-date with as much detail as possible on each of your sales, including any credits issued. Make a habit of checking the ledger on a regular basis to identify any upcoming or missed payment deadlines. By flagging problems early on, you’ll avoid large and unmanageable debts.

Tools such as Ledger Manager Software can help with this process, merging your sales data with Experian’s credit information to highlight the top debtors to your business.

Prioritise customer relationships

Your business is built on strong customer relationships but it also forms part of an effective credit control process. As well as credit checking new customers, it’s important to run regular checks on existing ones because you never know when they might have fallen into financial difficulties. Keeping the lines of communication open should prompt them to be transparent and ask for flexibility if needed. If you have a strong working relationship to begin with, they’re more likely to understand why you might need to adjust the payment terms or ask for upfront payment.

Revisit your invoice design

If you’re often spending time chasing up late payments from customers, it might be time to look at the design of your invoices. Make it as clear as possible and simple to read – are your customers not paying on time simply because they misunderstood when it was due?

Keep critical information such as your accepted payment methods, credit terms and payment dates in a prominent position on your invoice, and don’t hesitate to re-iterate this in your client communications too. A number of specialist software providers such as QuickBooks can automate this process, helping you to deliver professional invoices every time.

It’s also worth asking what works for your clients. Some larger businesses may have strict rules dictating specific dates that invoices must be received by in order to meet the payment run. Establish as much of this information as possible, early on in the relationship, to help encourage on-time payments in future.

Monitor credit scores

If you’ve invested in a solution such as Experian Business Express then you’re likely to be routinely running credit checks on new clients or suppliers before working together. However, remember to also include regular check-ups on your existing customers too as their circumstances may change suddenly.

Prioritise bigger debts

It feels overwhelming if your business is facing multiple outstanding debts. If you’re in this situation often, it’s time to review your credit control processes.

In the meantime, focus your efforts on resolving the largest debts that have the biggest impact on your cash flow. This will help to safeguard your business from unmanageable debts mounting up.

Take appropriate action

If your attempts to source outstanding payment from customers are unsuccessful and the debt is mounting up, it’s time to take action. The government website outlines the steps and options available for collecting debts. These include mediation, making a court claim or sending a statutory demand – the appropriate method is dependent on the amount of the money owed.

If there’s no other option than to take legal action, first you must formally inform the customer of your intention. This is done via a Letter Before Action, explaining your intention to commence legal proceedings if the debt isn’t resolved within a specified date.

Before entering into this process take the time to understand the full requirements and consequences of doing so or hire an experienced legal professional to help.

Managing problem payers

Even with the most effective credit control procedures in place, there will be some customers who fail to make payments on the time agreed or sometimes, not at all. Managing problem payers isn’t easy but having a system in place to chase up outstanding debts is crucial – professional credit controllers are experts in this, so consider investing in one as your business grows.

When implementing a system for chasing debts, you must agree on terms such as:

• How quickly should you start chasing once a payment date has passed?

• If there are lots of debts, which ones will you chase up first?

• At what stage will you consider taking legal action, or hiring a debt collection agency?

After agreeing on a date to start chasing up your owed debts, start the process informally through a series of telephone calls or emails. Explain the money is due and establish when you can expect the payment. Ask for as much detail as possible in your response. For example – a customer is likely to agree to look into the matter and call you back. If so, arrange a specific time and date for when you will discuss the matter next. If a customer states a cheque has been sent in the post, ask for the cheque number or the date it was sent to confirm its authenticity. Always keep a written record of each conversation during these communications.

If, after regularly chasing, the invoice is still not settled then you will need to take further action to prevent cash flow problems.

Keep your communications polite and formal and, more importantly, put delivery of any further goods or services on hold until the outstanding invoice is paid.

Options for collecting debts

There are two options for addressing client debts that have reached unacceptable levels. The threshold can be decided by you but generally, if a debt is more than 30 days overdue and the client is failing to respond to communications, then it’s time to initiate debt collection.

1. Legal action

If you decide to take legal action, you could hire a solicitor or choose to do so yourself.

A professional firm will start by sending a letter of claim (you can view a template here) which will start the legal proceedings. Typically, this provides any supporting documents, such as record of communications, as well as information on the debt you’re trying to collect. A deadline for a response or payment should also be included.

This may be enough to resolve the issue and you could receive payment. If not, then your solicitor will start to build up your case.

Going through this process without a professional solicitor can be time consuming and there’s a risk you may get something wrong, but it’s still an option that many businesses choose. You can follow the steps to make a money claim online.

2. Debt collection

Passing the debt over to a debt collection agency helps to remove the burden of a business debt, enabling a specialist to speed up recovery of the funds, although there will be a fee. It goes without saying that they should be reputable because their actions reflect on your company.

Look for an agency that’s registered with the Financial Conduct Authority (FCA) and belongs to the Credit Services Association. A good debt collection agency will follow all industry compliance and maintain a good relationship with your customer and not intimidate them.

Making a court claim and using legal representation to collect monies owed to the business should be the last resort in this process. Ultimately, it should end with you being paid what you’re due but will almost certainly conclude with you losing the customer in the long run. It’s unlikely you’ll ever establish a professional relationship again. If you can reach a satisfactory conclusion before this stage, all parties should see the benefits.

Next steps

Credit control is not an easy job – it requires organisation, persistence, professionalism and understanding. But by having set procedures in place and following them through, step-by-step, you can minimise any risk and financial losses, improve cash flow and therefore the success and smooth running of the business.

Good credit control management requires organisation, planning and ruthlessly sticking to processes. While talking to your customers about their ability to pay can be a sensitive issue, credit control is also a standard process that should also reassure them that your company is reputable and does its due diligence.