​Credit Control Checklist for Small Businesses

Responsible credit control procedures are very important to small businesses, as they can help you keep on top of collecting payments and achieve forecasted profit figures. By establishing a strong credit control policy, you can give your small business the best chance of success and offer your customers the financial flexibility they require to trade with you. 

What is Credit Control?

Credit Control is the process of offering credit to customers and collecting payments. It also involves customer profiling to understand borrowing behaviour and the likelihood of repayment. This is because identifying whether the customer is a responsible borrower can help determine the risk of the business. Before offering credit, it’s in your best interest to check if the customer is creditworthy, and here’s how:

1. Perform a credit check

An application form can give insight into information such as bank and trade references from which you can get an idea of the borrowing behaviour of the customer. You can also request permission to administer a credit check which will shed light on any possible County Court Judgments (CCJ) against businesses you are trading with.

By performing a credit check, you’ll be able to view the customer’s credit report and if you decide to extend credit to them, you can track their behaviour by creating a profile on the customer.

Using an application form or a credit check service can help determine a customer’s creditworthiness and the level of risk they pose to your business. By failing to perform any prior checks, you are unable to minimize risks that could jeopardize the financial health of your business.

2. Create robust payment terms  

As with other transactions, stating the terms and conditions clearly and concisely can help you to reach a mutual agreement. By stating the borrowed total, the amount payable and the time frame in which the credit should be settled, you can reach a mutual understanding. 

Late payment is a serious issue and this should be underlined in the payment terms by clearly stating any late payment fees. 

3. Have a centralized payment management system  

By using one central management system to manage payments, you can issue digital invoices, send reminders and schedule chase-up emails. You can track the payment status of invoices, and keep a close eye on payment history and control credit accordingly. 

Portals can enable you to store invoice template emails, speeding up the chasing up process. If emails fail to work, it may be time to pick up the phone to cut out the waiting time between sending an email and awaiting a reply. If payment is questioned by HMRC or the customer, an online central system as such serves as an audit trail.

By using an automated reminder system, you can keep track of payments due and flag when reminders should be sent to the customer. Offering alternative methods of payment can also encourage customers to make speedier payments, making it more accessible. Online software integrates seamlessly with online payment gateways, such as Stripe, PayPal and Worldpay.

Speed up the process by using an online platform which allows your customers to sign agreements and invoices electronically, such as PandaDoc and DocuSign. Once payment has been made, soften the customer relationship by sending a thank you message within 24 hours of receiving payment.

4. Have a clear collection process

To enforce an effective credit control process, make sure that you have the details for the correct person managing payment, such as the finance director. If it’s a medium-to-large business that you’re trading with, they may run payments on a specific date during the month so by aligning your invoices with this date, you may be more likely to receive payment.

When chasing invoices, decide the order in which you wish to pursue payments, such as the invoice with the highest value or the longest owed. When sending reminders, ensure you detail the consequences of late payment and any action you wish to take as a result of this, such as court proceedings, the appointment of debt collectors or rolling interest.

5. Check Companies House data

If your customer is a limited company, check their financial health by viewing their company accounts on Companies House. This information is available to the public and can show you whether the business has any outstanding charges or is profitable. Specialist data intelligence providers, such as Red Flag Alert can also keep you informed on the financial health of selected businesses. Each flag represents detrimental financial difficulty experienced by the business, such as a County Court judgment or any possible insolvency action.

Credit control is vital for small businesses, as without a fool-proof procedure in place, outstanding payments can eventually turn into bad debt, tightening the pot of working capital available to the business. This also increases debtor days which is the average number of days in which payment is made by a customer. This is a reflection of whether the business is cash-rich or cash poor, as the longer a customer takes to make a payment, the more detrimental the effect is on the business.

When credit control procedures are tried, tested and tailored to each customer, the collection of payments can be a fuss-free process. Effective credit control is a sign of a well-run business and this is critical for small businesses as they are less likely to have emergency capital as a fallback. Stringent controls can help ensure the business has enough funds to continue operating and win new customers.

About the Author

John Baird is director of Scotland Debt Solutions, a personal debt recovery service for residents in Scotland. John is an experienced advisor in a range of debt solutions, helping Scottish residents lead a debt-free future. The Scottish-based firm, with over 25 years’ experience, can assist with Sequestration, Trust Deeds and Debt Arrangement Schemes.