2 min read
In brief terms, credit control refers to schemes employed by businesses to expedite sales through extending credit to customers. This is usually confined to customers with good credit history. In this post, we’ll explore credit control in detail so that you can decide whether it’s the right strategy for your business.
Credit control definition
In more detail, credit control, which can also be referred to as credit policy, or credit management, pertains to the strategy of offering potential clients credit in order to purchase products and services. Generally speaking, businesses will favor offering any such credit to customers with good credit history, and avoid offering it to any customers with poor credit, or a history of failing to meet payments.
Why credit control is utilized by companies
Essentially, the success of a business depends on the demand for its products and services. Higher sales will yield high profits, which will have a knock-on effect on the value of company stock. Sales are therefore a clear metric for measuring a company’s success or failure.
The amount of sales, however, is affected by a number of factors, some of which are within the company’s control, such as price, quality, marketing strategy etc., and some which cannot be controlled by a company, such as the health of the economy, inflation, embargoes etc.
Credit control was therefore introduced as a means of attracting customers to make purchases with a company. The idea being that it will boost sales, which as discussed, the success of the company depends on. By breaking the price of a product or service down into instalments instead of requiring an upfront payment in full, customers can easily be better persuaded into making a purchase. This is the case even though accrued interest will ultimately increase the price they are paying.
The benefit to customers is that they have a more manageable payment plan, allowing them to make purchases they perhaps would otherwise not be able to. The benefit for businesses, meanwhile, is an increase in sales leading to an increase in profits.
However, ensuring that the strategy leads to increased profits depends on the customers being able to repay the credit issued to them. This is why good credit control policy and thorough assessments of customer ability to make repayments are essential.
Credit control policies
A company must decide which type of credit control policy they want to put in place. There are three levels of policy: restrictive, moderate and liberal. Restrictive policies are low-risk, exclusively offering credit to customers with good credit. Moderate policy is slightly less limiting, allowing individuals with average to good credit to purchase on credit, while a liberal policy is high-risk, extending credit to the majority of customers that request it.
Elements of credit control
A credit control policy will include the following four elements:
Credit period - The length of time a customer will be making repayments, e.g. 48 months.
Cash discounts - Some businesses offer a discount from the sales price if the customer is able to repay in cash before a certain deadline. This typically incentivizes customers to pay back credit quicker.
Credit standards - The credit history a customer is required to have in order to be eligible for credit.
Collection policy - The strategy a company will have in place for chasing up slow or late repayments.
Companies typically have a credit manager or dedicated team for setting up and handling credit control policies.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.