Credit control is a strategy by which lenders ensure that they lend money only to customers with a good credit record and who have a good probability of paying back their debts. At the same time, credit control also ensures that the company or institution does not extend credit to delinquent borrowers or those who have a poor credit record. Credit control is used by companies and banks to ensure judicious (and profitable) lending and minimizing the possibility of losses due to bad loans.
What type of lenders use Credit Control?
It could be used by manufacturers, retailers or banks and other lending institutions. It is a strategic method of ensuring that the company only lends where there is a high chance of being repaid. Credit control is also known as credit management and would usually work under the Risk Committee in the company.
Why is Credit Control important?
It can be a vital way of maintaining the company’s cash flow. Let us, for example, say that the lender, Company X, has made several uncoordinated and bad credit decisions and has lent to borrower, Company Y, who has a patchy credit record. There is a high probability that Company Y might not repay its debts, given its past credit history. Now imagine this scenario with multiple borrowers defaulting on their payments. Company X fails to receive the money and, in the worst case, might not have the liquidity to maintain its operations. Worse still, it has to spend an enormous amount of time, energy and money in trying to recover these unpaid dues. It is far better to prevent the problem from occurring, instead of using valuable resources trying to trouble shoot after the problem has burgeoned.
Credit Control checks ensure that credit is extended only to good customers while avoiding bad debts Injudicious sanctioning of credit can have very serious consequences for the health of the company.
How does Credit Control work?
The effectiveness of lending policies are only as good as the company’s credit evaluation process. Credit control officers need to determine the creditworthiness of borrowers and balance the advantage of extending credit for the purpose of increasing sales with the risk of potential losses with delinquent borrowers.