What Is Credit Control and How Does it Work?

Credit control is a financial strategy used by businesses and financial institutions to manage the extension of credit to customers. Thus, this strategy is important for ensuring timely payments and minimizing the risk of defaults. Typically, it involves assessing the creditworthiness of potential borrowers, setting appropriate credit limits, and collecting outstanding debts efficiently.

The objectives of credit control are clear – maintaining a healthy cash flow, reducing bad debts, and supporting overall financial stability. Thus, organizations can make informed lending decisions while building trust with customers.​

In the following sections, we’ll understand how credit control works and its importance for organizations.

 What is Credit Control?

In normal business parlance, credit control implies a business strategy for promoting the sale of goods or services by offering them on credit to customers. It is also known as credit management.

Businesses offer credit to customers with a strong credit history. An efficient consumer credit control system helps businesses increase sales and customer base. It helps manage cash flow through a regular inflow of customer payments/loans.

Credit control has a much larger role in a nation’s economy. The Reserve Bank of India (RBI) – the central bank of India regulates credit or liquidity in the economy. RBI controls credit extended by commercial banks to customers. Credit control forms an important aspect of the lending scenario in India.

What do you mean by credit control? It has to be understood from the lending perspective to evaluate its functioning and importance.

There are several steps involved in the credit control process. Businesses use these steps so they can effectively manage credit and minimize their financial risks.

1. Establishing Credit Policies: Define clear guidelines on credit terms, payment schedules, and procedures for handling defaults. This ensures consistency and clarity in credit dealings.​
2. Assessing Customer Creditworthiness: Evaluate the financial stability and repayment history of potential customers before extending credit. This minimizes the risk of defaults.​
3. Setting Credit Limits: Based on the assessment, determine appropriate credit limits for each customer to manage exposure and safeguard cash flow.​
4. Issuing Invoices: Send out invoices immediately after goods or services are delivered to encourage timely payments and maintain steady cash inflow.​
5. Monitoring Receivables: Regularly track outstanding payments to identify overdue accounts and take proactive measures to address them.​
6. Sending Payment Reminders: Dispatch reminders to customers with pending dues to prompt timely settlements and reduce the incidence of bad debts.​
7. Implementing Collection Procedures: If payments remain overdue, initiate collection processes, which can include follow-up communications or engaging collection agencies for recovering dues.​