Credit control policies and procedures for small business
Lots of businesses struggle to get the money they’re owed because of poor credit control procedures.
What is credit control?
Credit control is anything you do to reduce the wait between supplying a customer and getting paid. Your customer owes you, so you’re extending them credit – but you’re trying to do it in a controlled way.
Credit control is a delicate balancing act. While it’s important to get your money as soon as possible, customers might leave if you’re too aggressive.
Why you need a credit control policy
Not many small businesses have credit control procedures when they first start. They just issue invoices and hope for the best.
But fewer than half of invoices are paid on time [US: more than a third of invoices are paid late] and, before long, that takes its toll. Cash flow can become an issue, and chasing payments is a pain.
If that sounds like you, it would probably help to develop formal credit control procedures.
Credit control techniques you can use
You could run credit checks on businesses before accepting them as new customers. If they score well, they’re more likely to pay on time. Another option is to change your payment terms so customers have to pay faster. But what about the customers you already have? The ones who would complain if you shortened their payment terms?
You could still get your money faster by tightening up your invoicing and collection policies.
Invoicing and payment collection mistakes to avoid
Here are nine common mistakes that slow down the payment process for small businesses.
1. Assuming all clients are the same
It doesn’t matter if you have 99 customers who all process your invoices the same way, the 100th could be different. And if you don’t send the invoice just how they like it, you may not get paid. Whenever you land a new customer, always ask:
· who do I talk to about invoices getting paid?
· what information has to go on the invoice for it to get paid?
· when do you do payment runs?
With this information at hand, you’ll never waste time sending an invoice that simply can’t be paid, or chasing the wrong person when it’s past due.
2. Unclear payment terms
Spell out how long your customer has to pay you, and identify any late fees. Put these in a condition of sale document and get your customer to sign it (physically or digitally) before you start doing business. That way customers can’t use confusion or misunderstanding as a defence for late payment.
3. Slow invoicing
Send invoices as soon as you can. Immediately after delivering the product or service is the best time. That’s when your customer is feeling the most goodwill and will be most receptive to paying. The second best time to send an invoice is right now, so get busy. Customers simply can’t pay what they haven’t been invoiced.
4. Rolling over
Late payment is very common. It can be tempting to give in and accept it as part of life. But don’t. Review outstanding invoices regularly. Highlight the ones that are the furthest overdue, and the ones that are worth the most. Make a plan to get them sorted out.
Speak with the customer and consider things like offering different payment methods, giving early-payment incentives, or changing the credit terms. You have lots of options. Don’t worry if your first few strategies don’t work. Every customer and every invoice is unique. The only way to fail is to give up trying.
5. Shying away from the phone
When the due date’s up, it’s up. Tell your customer they’re late. Statistics show that 80% of unpaid invoices can be collected through email chasing alone, so start there. But when that isn’t enough, pick up the phone.
Customers find it harder to justify late payment when you have them on the line. And if there are issues to sort out, you can discuss them in real time instead of spending a few more days emailing back and forth.
6. Not thanking for payment
Say thanks when a customer pays, whether they were on time or not. These positive messages strengthen the relationship and actually increase the speed of future payments.
It takes no time to send a positive email. Work it into your credit control process. Just ensure it’s sent within 24 hours of payment to keep it relevant and genuine.
7. Making (empty) threats
Some customers always pay late. If you’ve had enough, you might decide to charge late fees and interest, stop supplying goods or services till they pay, send out debt collectors, or take them to court.
These are serious moves and your customer may react by taking their business elsewhere. Don’t make threats lightly. But if you do make a threat, follow through. An empty threat gets you nowhere. The customer won’t take you seriously again, and you could be stuck with late payment forever.
8. Forgetting your teammates
Late payment might be the finance team’s responsibility, but others can help. Tell sales staff and account managers when their customers’ accounts are overdue. They might be able to leverage their relationship to get an invoice paid. Or they might make new sales deals contingent on old invoices being settled.
9. Not using the right tools
Once you’re issuing 25 or more invoices per month, credit control gets complex. There are lots of emails, phone calls, and handwritten notes floating around. Some information gets stored in a client relationship management system, but other data is only held by accounts payable.
To carry out quick and effective credit control, manage it centrally through one piece of software. Online credit control software helps you store all invoice communications and histories in one place. It also gives you insight into your customers’ payment habits, and helps you optimise your chasing strategies. With integrated online software tools, you can save hours each week and boost your cash flow by thousands.