Reviewed by Sep 30, 2020| Updated on
Credit control is defined as the lending strategy that banks and financial institutions employ to lend money to customers. The strategy emphasises on lending money to customers who have a good credit score or credit record.
Customers with a good credit report generally have an excellent track record of repaying their debt. This allows lenders to bring down the risk of defaults when issuing a new line of credit to customers.
Credit control helps banks and financial institutions to recognise delinquent customers with a poor credit report and ensure that such borrowers are extended a line of credit. This can eventually help the lenders ensure to minimise the customers’ probability of not repaying their debt on time and increase profitable lending.
Banks, financial institutions, retailers, and manufacturers use this strategy to ensure profitable lending and lend to only those customers who have a high probability of repaying their debt. The risk committee of the company monitors credit control to minimise losses due to poor loans. Credit control is also referred to as control management among the lenders.
Credit control plays an important role when it comes to maintaining lending companies’ cash flows.
Consider an instance where a lender takes an uncoordinated decision and loans credit to a borrower with a poor credit record. Chances are the borrower is likely to miss out or delay the payments with respect to the past credit record.
If this continues on a wider scale where the borrower is unable to repay the debt and default on the payments, the lender could eventually end up with inadequate liquidity and in the worst-case scenario might have to shut down its operations.
Credit control ensures that only prospective customers who have a good credit history of making their debt repayments are preferred. This will ensure that the company will have enough cash flow and liquidity to maintain its operations.