A Guide to Credit Control for Small Business Owners

Credit control is the process by which businesses extend credit to customers in order to make it easier for them to purchase a good or service. This could be by delaying payment or breaking down the total purchase amount into more manageable installments. This strategy drives up sales but it’s important to be careful about how you extend credit, and to whom, or you could end up in financial hot water. In fact, research by Graydon found that over half of business bankruptcies are related to poor credit management. We’ve put together a guide to credit control for small businesses to help you manage this process wisely.

Credit Control Policies

It’s important to choose the right credit control policy for your business. Broadly speaking, there are three policy levels:

  • Restrictive. This is a low-risk strategy whereby credit is extended only to those customers with a strong credit history.

  • Moderate. This is a medium-risk strategy where a business extends credit to a larger proportion of customers.

  • Liberal. Under this policy, a business extends credit to most customers, generating more sales but running a higher risk at the same time.

If you are aiming to gain a large market share, then a liberal credit control policy may be better suited to your business. However, if you are already experiencing cash flow issues or operating at a low profit margin, it may be more prudent to be more restrictive.

Credit Control Factors

There are four primary credit control factors:

  1. Credit period: the length of time a customer has to pay for a good or service.

  2. Cash discounts: when a business offers a customer a discount if they pay in cash before the end of the credit period. This helps with cash flow.

  3. Credit standards: This is the set of standards used to determine whether or not a customer qualifies for credit.