Designing A Credit Application That Works For Your Business (And Not Your Customer)

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Few customers offer to pay in cash.  Most want some form of credit.  What credit you extend results from an objective and subjective assessment of the prospective customer’s credit-worthiness.  The steps you take to assess credit worthiness can mean the difference between a good paying customer and one who can, quite literally, put you out of business.

Your product is valuable.  You do not want to just give it away for free, which is what you are likely to do if you do not require a credit application and verify information.

1. WHY Use a Credit Application?
Extension of credit is about trust.  Credit applications are important at the beginning of any creditor-debtor relationship to test the credit worthiness (and veracity) of the prospective customer.  The credit application should work for your business by allowing you to test the ability of your customer to pay its bills when they come due.

A complete and updated credit application can also provide a wealth of information should it become necessary to collect a stale debt.  There are generic credit applications available on the internet or in business supply stores.  They are not industry specific.  You may want to look at what competitors who are doing well in your industry may be using.  Bottom line: design one that fits and works for you.

2. WHAT Information Should a Credit Application Request?
Finding useful information about a business, especially one that has only been operating a short time, is difficult.  That is why a credit application is important.  Credit applications are not just about information, but useful information.  Think about what information you need now (to approve credit terms) or in the future (should the relationship sour).

A credit application should require the following minimum information:

  • Name of business and years in existence
  • Type of business and names, address, telephone number, and driver’s licenses of owners
  • Billing address (not a P.O. Box), telephone number, fax number, website address, email address
  • Shipping Address
  • Trade reporting service (e.g., Red Book) reference number
  • USDA PACA license number
  • Bank information, including name, address, telephone and account number (consider asking for a cancelled check)
  • Trade references – at least three in the industry
  • Terms of payment
  • Guaranty agreement

Think about: the state the business was formed, the social security numbers and/or driver’s license numbers of the owners of the business (especially if they are guarantors), and whether they rent or own their office.  The most important information is how long the customer has been in business, bank information, and trade references.

When contacting references ask: what were the terms, what credit limit was extended, what is the payment history?

Make sure the application is completed and signed.  A signature verifying that the information it correct is important as it binds the customer to the agreement.  It may also help to except the debt from discharge in a bankruptcy if the information was not truthful.

3.   HOW To Make The Most Out Of Your Credit Application

Here are some tips to get the most out of your credit application:

  • Trust but verify.  Check ALL of the information provided.  Be proactive.  Make sure the application is complete.  If there are blanks, ask why.  An application for credit should be more than a formality of doing business.  Check the information regularly.
  • Verify the business exists.  Most business, if legitimate, file documents with state authorities.  Check with state and local authorities to be sure the customer is who they say they are.
  • Be aware of the law.  Business credit checks are legal under the Fair Credit Reporting Act.  You may not generally check an individual’s credit without their permission.  Consult legal counsel when in doubt about anything legal.
    Beware of foreign customers.  When dealing foreign businesses consider requiring a letter of credit or some other collateral to secure payment.
  • Verify authority.  Make sure the application is signed by an authorized agent.  Get a title.
  • An application is a contract.  A signed application for credit, which incorporates key terms of the engagement, e.g., payment and delivery terms, recovery of costs of collection and accrual of interest, are essential. This is particularly true if you are altering the prompt payment terms in the PACA.
  • Consider a guaranty.  When dealing with new customers, enhance collection and emphasize the seriousness of the relationship by requiring a personal guaranty.  Make sure it is absolute and continuing in form and does not require that you liquidate the claim against the customer prior to enforcing the guaranty.

Be careful out there.  Considerate attention to the credit application and process will, hopefully ensure a solid and profitable relationship with your customer going forward.

Bruce W. Akerly is a partner with Cantey Hanger LLP.