After the mission has been outlined, the specific goals to accomplish the mission have been drafted, and the organization of the department has been set, the credit department can actually begin doing work. Credit Evaluation is central to the function of the credit department. Minimizing credit risk/exposure, protecting margins, and maximizing profits all stems originally from a good evaluation of the potential customer’s credit. Much of the work in evaluating the potential credit customer’s credit is accomplished through a thorough credit application.
Every Credit Customer Should Complete Credit Application
Standardizing the credit process by having every potential credit customer (every customer can be a credit customer in some industries) fill out a credit application helps to create a procedure by which the potential risk associated with extending credit can be mitigated. 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. Depending on the information in the credit application, the payment terms may be modified — and some customers may not qualify for credit at all. While it may hurt to turn down a sale if the results of the credit application are not sufficient to meet your policy guidelines, the actual cost of a non-paying client is much higher than the amount of the lost sale.
As well as contacting the credit references listed in a potential customer’s credit application, it can be a good idea to run a credit report. Trade credit bureaus take information about credit transactions and create business credit reports. There are a few major business credit bureaus through which you can receive a business credit report, including:
Dun & Bradstreet
Credit reports provide a nice snapshot to help make credit decisions, and should be a standard part of a proper credit application. Note, however, that certain information is required to run a credit report on a potential customer, (that information should be included on the credit application), and the application should contain a clause allowing you to run a credit check – both on the business, and potentially personally, as well (depending on the size of the potential customer’s business, and other factors).
Information to Include on Credit Application
Information to be included on the credit application should include:
- Contact Information
- Credit Information — Credit Report of the business (and potentially of the owner as well) should be pulled (obviously dependent on the potential customer). To accomplish this you will need an EIN for the business, and an SSN from the owner.
- Landlord and/or Mortgage Holder References — If the business doesn’t pay rent or mortgage on time, how likely is it that you’ll get paid on time?
- Bank and/or Trade References — Same thing applies here. A clearer picture of the customers financial picture appears with every new piece of information.
- Payment Terms — You may wish to outline your general payment terms in the credit application itself, clearly, though any potential modification to the general payment terms would then need an additional signed document. You may wish to keep the two separate, as well. Once a credit decision has been made, the terms can be set and agreed to in a separate document.
- Personal Guarantee — A personal guarantee added to the credit application gives you an added layer of security, and potential collection tool. Nobody extends credit to a company that they think won’t pay, but the personal guarantee of the business owner (or contracting party) can sometimes provide an extra push to receive payment. Note, however, that this is likely not an option when dealing with a larger potential credit customer.