Guest Post: Credit Control basics for small businesses

Posted on June 30, 2021
Posted by Guest


As a freelancer, or the owner of a small business, you’ll already be aware of the importance of managing cash flow. Credit control plays an important part in this, which is why implementing an effective credit control strategy is crucial to maintaining small business working capital.

Whilst larger companies usually have access to credit control departments that are dedicated to tackling this issue, small businesses need to put in place / set up credit control processes to mitigate the risk of late paying clients and prevent accumulating debt.


What is business credit control?

Credit control is a business strategy that works to manage customer debts and prevent a business from becoming illiquid. A big part of business credit control involves analysing customer borrowing behaviour to identify the likelihood of repayment.

Covering all aspects of money flowing in and out of a business, credit control processes work to ensure your business is equipped to manage late payments and avoid bad debts, all of which helps prevent cash flow issues from occurring.


Getting started with credit control

Lots of small businesses forgo credit control processes and start issuing invoices to customers with the assumption they’ll get paid on time, no issues.

However, more and more businesses are realising that this is simply not the case. According to FSB, around 30% of payments to UK small businesses are late, with an average payment delay of 6 weeks.

As a starting point, before agreeing to take on a potential customer or client it’s a good idea to check their creditworthiness to determine risk. Free information such as filing history and accounts can be found using HMRC.

More detailed reports about a customer’s financial situation can be accessed through a credit reference agency. These agencies can provide you with comprehensive credit checks, which give you a window into their previous borrowing behaviour and reveal how likely they are to make payment.


Setting out a contract with clear credit terms

When working with a new customer, it’s important to establish your payment terms straight off the bat. Clear credit terms will help to prevent confusion when the time comes to issue your invoices. It will also ensure a mutual understanding of your agreement, including the time frame in which payment should be settled.

It’s important to note that an invoice is not a contract in a legal sense. So, you can take this one step further by asking your clients to sign a credit agreement, in which you outline the rules or terms of doing business.

This legally binding agreement is proof that both parties have accepted the terms and will be helpful in the event you have issues collecting payment from your customer.


Sticking to a schedule for each invoice issued

Make sure that you follow the same process for each client to ensure efficiency. Don’t delay sending out invoices for your goods or services, instead, send as soon as they have been provided. By doing so, the work you’ve done will still be fresh in your customers minds, increasing the chances of a timely payment being made.

After issuing, some businesses opt to sell the invoice to a credible invoice finance platform. By choosing to do this, you can receive payment in advance for a small fee of around 1 – 3%. This eliminates the worry of potential late payment and helps with cash flow management. Find out more about how to do this.

Friendly reminder

If invoice financing isn’t for you, it’s important to set out a schedule by which you keep track of all invoices. Depending on your invoice payment deadline, it’s a good idea to check in with your client or customer around 7 – 14 days after sending out the invoice. At this stage you can ask to confirm that they have received the statement, and find out whether they have any questions about payment.

Statement of accounts

If you don’t receive payment by the due date, you can send over a statement of account. This is a document reflecting all transactions that have taken place between you and your client and can serve as a good reminder that payment is due. It can be followed up with a friendly nudge explaining that you have not yet received payment.

Formal payment request

Following this, if payment is two weeks overdue and you have still not heard anything back, you should proceed to issue a Letter Before Action (LBA). This formal payment request will outline the money owed to your business, and warn of a future court claim in the event of continued non-payment.

Part of the letter should outline how long your client has to pay, which is usually set at seven days.


Following through on debt recovery

A huge one third of businesses that get paid late do not chase their outstanding payments. However, there are steps you can and should take in the event payment collection is unsuccessful.

  • If you still don’t hear back or are unsatisfied with your client’s response to the LBA, you can submit a claim form to settle the issue in a small claims court.
  • You can also try to reach a solution using an impartial third party mediation service. This can be cheaper than going to court, but not always as effective.
  • In the event you don’t feel comfortable starting legal proceedings by yourself, you can use a reputable debt recovery agency to do so on your behalf. These specialists are able to escalate claims made by small and medium sized businesses in return for a fixed percentage of the debt.


When following through with debt recovery you should also find out more about the rights you have to charge interest on late commercial payments. According to The Late Payment of Commercial Debts (Interest) Act 1998 and the Late Payment of Commercial Debts Regulations 2002, you are entitled to add statutory interest to the money owed.


Final thoughts

For small businesses, credit control is vital to cash flow success. Putting in place a fool-proof procedure will help prevent bad debt impacting the working capital your business needs to survive.

It doesn’t matter whether you’re a new startup or more established business, if you haven’t done so already, it’s important to take steps to implement your credit control strategy today.

This article was written and published by a third party and Sparqa Legal assumes no responsibility for its accuracy, completeness or quality. It is being redistributed for information purposes only, and does not constitute legal advice. To the maximum extent permitted by law Sparqa Legal excludes all liability for third party content made available on its site. Sparqa Legal’s Terms of Use apply to your use of this article.