Credit control is a strategy used by businesses to extend credit to potential customers to increase the sale of products and services. The goal is to work with as many creditworthy consumers as possible and limit how frequently credit is offered to consumers with poor credit.
Definition and Example of Credit Control
Credit control is a standard businesses use to determine how much credit to offer their customers. While getting paid upfront is the easiest and safest way for most companies, it can also limit the total profits.
Extending credit can make it easier for potential customers to purchase your products and services. By breaking up the payments into monthly installments or letting customers pay later, it can make the purchase more manageable.
- Alternate name: Credit policy
For example, a company may offer in-house financing in which they allow customers with high credit scores to pay off a purchase over a set period of time. In theory, the financing encourages customers to make purchases, thereby boosting the company’s sales.
How Credit Control Works
The success or failure of your business largely depends on the sale of your products and services. Sales are a clear metric for business success: the higher your sales, the higher your profits will be.
Before you extend credit to your customers, you need to have a credit policy in place. Credit control determines who your business extends credit to. Extending credit to customers with a poor credit history or delinquencies can ultimately hurt your business more than it helps.
A credit control policy can play out in a variety of different ways, depending on the type of business you run. For instance, professional services businesses may offer credit terms to individuals and companies. After the service is provided, they’ll typically send an invoice with payment terms depending on the service agreement.
An e-commerce business, on the other hand, may set up a monthly installment plan to pay for the purchase of products. These types of companies will usually accept credit cards and other online payments.
When a business offers another business the opportunity to pay later, it’s often referred to as “trade credit.” Business owners should be aware of how it can affect cash flow.
Types of Credit Control
Two common types of credit control are restrictive and liberal. The policy your company implements will largely depend on its size, profit margins, and total market share.
Restrictive Credit Control
A restrictive credit control policy poses the lowest level of risk to your company. It means that you’re only willing to work with customers that have a strong credit history. This is a good option for companies with low profit margins or where there are many risks involved.
Liberal Credit Control
A liberal credit control policy means the business is willing to extend credit to most customers. Companies that have high profit margins or operate in a monopoly may prefer a liberal credit policy.
Only offer credit terms to your customers if the potential benefits outweigh the downsides. If you offer credit to your customers but don’t receive any payment the majority of the time, it won’t matter how much your sales increase.
Types of Credit Options
If you choose to extend credit to your customers, you’ll need to decide which types of credit you’re going to accept. Here are a few of the most common types of credit options you may choose to offer.
Companies that choose to accept credit cards will have to decide which payment options they’re willing to accept. For example, a merchant may not accept credit cards from a certain issuer but accepts cards from other issuers. Companies will pay an interchange fee for every card transaction, starting as low as 1.15% plus a few cents for Visa and Mastercard transactions. However, accepting credit cards comes at a very low risk to businesses because the risk falls on the credit-card issuers and not the individual customer.
Some companies still accept checks from customers, though this can be risky. There is always a chance the check will bounce. If you choose to allow this option, you need to have a policy to obtain customers' identification.
Finally, some businesses will extend credit terms to their customers. If you do this, you’ll need to have your customers sign a sales contract that outlines the payment terms. Before the terms are binding, the agreement must be in writing and signed by the customer.
- Credit control is the process of extending credit to customers to increase the sale of a business’s products or services.
- Offering credit to customers can make the purchase more attractive and help increase the company’s profits.
- Most companies will accept credit cards; others may also accept checks or extend credit terms to their customers.