The first step in managing credit wisely is to make informed decisions about which parties should qualify, how much credit they should be extended, and the terms thereof. Your credit application is what allows you to decide whether or not a customer is worth doing business with (i.e. what is their risk factor). This article discusses the essential components of a quality and useful credit application.
Part I: Information, Information, Information
The credit application process is most accurately considered an information gathering process. It’s important to think of it in this way, and to contemplate all the reasons why you need this information:
- To make an informed decision about whether the customer is creditworthy
- To locate and contact the customer in the event of non-payment
- To successfully collect from the customer in the event of successful litigation
With these goals in mind, you’ll construct an application that seeks relevant data about your customers. This data may include:
- Contact Information
- The Accounts Payable Representative
- EINs for business entities and SSNs for related individuals
- Trade credit references
- Bank references
- Exact company information (i.e. formal business name, billing address)
- Licensing information (if they have or are required to have a contractor license)
- Dunn and Bradstreet Number
It’s okay for your credit application to request information most heavily from the business entity itself. However, it is sometimes a good idea to look to the company’s principals for information and credit guarantees, especially if it is a young company with a shallow credit history.
Related: How to sell to a customer who doesn’t pass your credit check
Part II: Permissions
The first goal of your credit application is to get information. The second goal of your credit application should be to get permission to legally use the information provided.
This is largely asking for permission:
- To pull a credit report on the business and any applicable individuals
- To contact trade and bank references
While each of these behaviors may be implied by the credit application process, it’s best to have permission in writing and in your file. In some cases it’s required (to get bank references and to get a credit report), and in other instances, it’s just a best practice (for trade references).
Part III: Signatures and Personal Guaranty
This may seem obvious, but in my litigation experience, I’ve come across a lot of unsigned credit applications. Do not allow this oversight.
Signatures are especially important when it comes to personal guaranty provisions. Savvy businesses get a personal guaranty from customers whenever possible. Having a personal guaranty in your pocket can make a big difference when a customer is trying to avoid debt.
The terms of a personal guaranty may be included in a standalone document, but it is a common practice to include these provisions within a credit application. However, be very mindful of the signature requirements when you do this. The credit application will need to be signed more than once.
The principal will need to sign first for the company, and then a second time in his individual capacity. Do not allow the individual signature to make reference to the individual’s capacity with the business (i.e. referencing President title).