This post is geared to those in the construction industry who extend credit to clients, but the principles discussed below, can generally apply to all businesses. Credit applications are an integral part of credit policy. When a new customer wants to buy from your business on credit, there are certain pieces of information that need to be shared. As the creditor, do not be afraid to ask, the more information you get the better.
The credit application is one of the documents referenced above which new clients expect to fill out. This should be a standard document that you give to all customers who want credit. One thing that I see commonly, is that the credit application was not completely filled out from the beginning. There is a reason why the information on the credit application is sought, therefore train all of your employees to get all of the information on the credit application form.
Business Credit Check
This is a no-brainer. Checking the credit worthiness of a business should be the first item of due diligence when processing the credit application. There are number of different services out there who can run a credit check on a business. Dunn and Bradstreet, Experian, Trans Union and Equifax are the biggest credit reporting companies. These services can be used for both personal and business credit checks.
The problem with running credit on a business is that there can be hidden issues. There may also be issues that cannot be found from a report due to the set-up of the business and other businesses which are affiliated with the credit seeker. Further, many businesses are new and do not have established credit histories. This can be very problematic.
The most important thing to remember about giving a business credit based solely on its credit history is that the business can file for bankruptcy or go insolvent very quickly. This will leave creditors high and dry. In theory, a business can go belly up with little recourse. The business owner can then go start a new business and there is no way to collect against the new business or against the old insolvent business.
Savvy business owners know these pitfalls. This strategy is used often in the construction industry.
Demand all required credit application information from your client, you will be glad you did.
Personal Credit Check
So a business credit application and credit check are good places to start, but the inquiry should not end there. A much better way to tell how a business will act and its credit worthiness, is to perform a personal credit check on the business members or officers who are applying for the credit. You may get negative feed back when requesting this information. If so then that is not the type of business you want to extend credit to. Its a precursor for future problems. Heed warnings early when extending credit.
A personal credit report can be found at the same places listed above. You can also request references who you can contact to see if others have issues with the person who you will be extending credit.
Another helpful piece of information is to get a voided copy of a check from both the person and the business. This is very helpful for your attorney when he is collecting from the debtor who did not pay your bills.
Running the credit of a business and person is a good practice but the only way to make the individual a party to the contract for credit is to have them execute a personal guarantee. This is such an important document that it will be the subject of my next blog post in this series.
A personal guarantee can be a stand-alone document or it can be incorporated into your credit application. The personal guarantee is the only want to get the person, in addition to the business, on the hook for paying your invoices.
Personal Credit Does Matter
A business credit application and credit check is a good step in the right direction when it comes to credit policy. To take your policy into a new level of advanced security, you need to implement a personal credit check and guarantee. Not only is this good for collection later on down the line, it is also the best preventative measure your business can take.
If a debtor is not paying your invoices, its likely he is not paying others as well. Those businesses owners who do not pay, know who they have signed personally with. They are much more likely to pay the company who has them on the hook personally, rather than just the business.
In order to put your business in the best position to get paid, you must take all the necessary steps to secure your extension of credit.