Credit control – definition and meaning
Credit control is a company department that determines how much credit to offer customers. It is also responsible for chasing up late payers. Put simply; credit control is in charge of trade credit and recovering unpaid debts.
Trade credit refers to allowing buyers to pay at a later date. For example, if you allow a customer to pay thirty days after the invoice date, there is a trade credit arrangement. Most arrangements are for thirty, sixty, or ninety days.
In a small company, credit control may be the responsibility of just one person. In large companies, the department may have sub-sections. For example, there may be dispatch approvals, credit limit approvals, and collections sub-sections.
For businesses to succeed, they need make sure their customers pay them. If invoice payments come in very late, or not at all, a company can soon become illiquid.
Credit control boosts sales
A well-run credit control department can boost sales by offering credit to selected customers. It also minimizes the number of bad debts. For example, it can make sure that customer’s with poor credit ratings or histories pay their bills up front.
Credit control is a crucial part of running a business. It is especially important for new companies that do not have much cash.
Hundreds of thousands of start-up companies across the world go bust every year. Many of them are highly profitable.
However, customers owe them a lot of money. If customers don’t pay them, they cannot pay suppliers, and eventually have to shut down.
According to Cambridge Dictionaries Online, credit control is:
“The system used by a business to make certain that it gives credit only to customers who are able to pay, and that customers pay on time.”
The credit controller
We call people who work in credit control credit controllers. They decide whether to loan money to a customer. They also manage current debts.
Credit controllers might work either on commercial credit or consumer credit. Commercial credit and consumer credit mean lending to companies and individual people respectively.
Below are some of the main duties of a credit controller (data source: totaljobs.com)
- checking customer’s credit ratings,
- deciding which customers may be offered credit, and under what terms (e.g. how much),
- setting up the credit terms and conditions,
- dealing with internal queries regarding payments,
- making sure customers pay their invoices promptly, and
- negotiating repayment plans.
Factoring
Factoring, a type of financing in which a company buys your invoices, is useful if you require working capital.
The factoring company also assumes all the credit control duties. This is great for small companies because they can free up staff to focus on other aspects of the business.