What is credit control?

What is credit control and how does a credit control policy example apply to your small business? The term credit control refers to any actions you undertake to reduce the time taken for a debtor to pay what they owe your small business. 

When you invoice a customer (which is the same as expending them credit), you can use measures such as reminders, credit control policies, late fees, reminders, and incentives. 

These credit control techniques are all aimed at reducing the amount of time it takes your customers to settle their invoices.

Well executed credit control policies and measures not only help your business thrive with healthy cashflow and profitability, it also helps you avoid messy situations like debt collection or bad debts.

Let’s look at some common credit control techniques and how you can harness them to boost your business’s cashflow. 

What is a credit control policy?

A credit control policy is a methodology you adopt as a business when extending credit or issuing invoices. There are three commonly accepted tiers of credit control policy; restrictive, moderate, and liberal.

1. Restrictive: A restrictive policy dictates that you only extend credit to customers with good credit history and will have tighter terms and conditions and limits on credit. You may also require down payments and have harsher penalties.
2. Moderate:  A middle ground approach where terms are still tight and credit limits are capped. You’ll still be paying attention to credit history but will be more lenient in general.
3. Liberal: A liberal approach will see you extending credit to almost any customer. Credit history will likely be absent, limits will be higher, and terms and conditions will be looser.

Credit control policy example

Let’s have a look at a credit control policy example. If you’re a plumber and have had bad experiences with late payments or having to pursue debt collection, you may choose a restrictive credit control policy:

• You do your research and only do business with debtors who have a good credit history.
• You’ll prefer known entities and will heavily scrutinise new customers.
• You’ll choose tight payment terms with quick turnarounds.
• You’ll have conservative caps and won’t extend large lines of credit.
• You may have attractive discounts for early payment coupled with harsher penalties for late payment.
• You may require a sizeable down payment before starting work.

Credit control techniques

In addition to a clear credit control policy, there are several credit control techniques at your disposal.

If your busines regularly sends invoices or extends credit, you should be aware of the following invoicing mistakes to tighten up your credit control procedures.

Avoid invoicing mistakes

To remove any unnecessary back and forth or erroneous administration, be certain you avoid invoicing mistakes.

You’ll inevitably derail prompt payment if you have incorrect:

• amounts
• payment details
• reference numbers
• contact information
• business details

If a customer comes back and disputes the payable amount or points out that their business details are incorrect, you’ll then have to fix the error and then resubmit the invoice.  

This will add days or weeks to the turnaround process on top of increasing distrust and dissatisfaction with your services.

Send the invoice at the right time

The quicker you send off your invoice to a customer, the quicker they can pay you. The best course of action is immediate action. 

By utilising invoicing software, you’ll have a few credit control benefits that will allow speedy invoice delivery:

• cloud based, mobile oriented functionality
• send invoices with a few clicks from anywhere
• incorporate a ‘pay now’ button for quick and easy customer payments
• send automatic reminders that your invoice is due
• see when they pay 
• easily report on accounts receivable

If you’re not using invoicing software and are instead going the manual route, be sure to never let invoice administration fester. Even waiting a day or two breeds complacency and forgetfulness on both ends.

To execute good credit control, be sure to send that invoice as soon as humanly possible after you’ve completed your work.

Consider offering a range of payment methods for your clients

The more payment methods you offer your customer, the better. 

While you shouldn’t go overboard and offer every option under the sun (which would increase hassle and administration on your end), offering lots of popular payment options will ease the friction of paying an invoice and increase timeliness.

Consider offering the following payment methods:

• bank account transfer
• credit or debit cards
• PayPal

If you stick with common, trusted, and widely used payment options, you’ll offer enough choice to cover most customers’ preferences. You’ll also avoid overextending yourself and creating an administrative and reporting burden.

Ensure your invoice looks professional and has the correct information

It may not seem that important, but ensuring your invoice looks professional can be a deciding factor in how seriously customers take you.

If you create slick, error-free, and easy to read invoices, you’ll exude professionalism that demands attention. If you have sloppy and error riddled invoices, you’ll run the risk of seeming unimportant and the desire to pay you can drop.

This means you need to ensure absolute accuracy of information, professional branding, clear structure, and an attractive layout.

Pro tip: If you want to send out professional invoices, we’ve created a free downloadable invoice template to remove the hassle of creating one yourself. 

Follow up

Another excellent credit control technique is to engage in regular reminders and follow ups. 

Sometimes a customer will genuinely forget they haven’t paid you. Other times, you may experience active avoidance or customers who put other business tasks above paying their debts.

There are a few ways to tackle this:

• If you use modern invoicing software, you’ll have access to automatic reminders. All you’ll need to do is set your reminder schedule, and your software will send out reminders to your debtors without you having to lift a finger. This is probably the wisest choice.
• If you’re engaged in manual invoicing, you’ll need an accounts receivable ledger or report. This accounts receivable ledger will list your invoices, the business they relate to, the debt amount and how late they are. You’ll need to order this list in terms of lateness, then work your way through it and send out reminders that your invoice is due.
• If nothing seems to be working, it’s time to go beyond email and software notifications. Pick up the phone and place some polite calls to the debtors in question. The more assertive and personal nature of a phone call can sometimes shake out the complacency of a debtor far more than a passive email or message. 

Clear invoice terms and conditions

How long can a debt be chased in New Zealand? Be sure you have bulletproof terms and conditions on your invoices. Most terms and conditions will outline when your invoice is due and the timeframes and penalties for late payment.

Outside of detailing what constitutes lateness and the penalties associated, you can also go along the incentive route. Consider a percentage discount if a customer pays within a week or another ‘early’ timeframe.

Another condition you may choose to stipulate is the requirement of a down payment. Before you start work for a customer, you may necessitate a certain pre-payment, which will be deducted from the final invoice.

By now you should have a strong understanding of what credit control is, how credit control policy works and some key credit control techniques that you can apply to your own small business.