Even though sales are the lifeblood of any business, any sale is not complete until the account is paid. And if your accounts aren’t being paid, a comprehensive Credit Application will help you recover as much as possible.
So what information should you obtain in your Credit Application and why?
Successful businesses with the least number of debt recovery matters follow a checklist (like ours below) for information that should appear in every Credit Application. Follow it to make sure your Credit App has the APP-propriate information too:
Get The Basics Right
1. Identify the correct legal entity
What type of legal entity is the customer? Make sure you have a section for individual sole traders, partnerships (in which case you will need the names and details of all the partners), and companies. You may even need a space for a charity, an incorporated association or even a government agency.
2. Verify the legal entity
Remove the chance for errors in a customer’s legal entity by verifying the information before a credit account is approved. An online Credit Application will do this step for you in real time, and won’t let your customer proceed to the next stage until it’s done. If you don’t have an online application, make sure you do your own checks and balances manually.
3. Catch trading trusts
If the customer is a trading trust then you should verify the name of the trustee, obtain a copy of the Trust Deed and a list of all or potential adult beneficiaries. This will ensure that, in the event of default, you can take action against the trustee and attack the assets that are owned by the trustee.
4. Snapshot of the customer
What is the nature of the customer’s business? How long has the customer been in business and how many employees does it have? If your potential customer has been in business for a very short time, has very few employees and is looking for a large facility then these are all warning signs of a heightened risk.
5. Comply with Privacy Laws
Ensure the relevant Privacy Act consents are provided and agreed to by the customer. This is so that you can make enquiries of credit reporting agencies and share any credit related information with your insurers, service providers, other related companies and other credit reporting agencies.
Assets And Other Information
This is probably the only time that you’ll get this type of information from a potential customer – when they want something from you. Leverage it now to help you determine creditworthiness:-
Find out whether the customer owns, rents or is buying it’s business premises or personal residence. It might seem nosey at first, but the answer can provide an indication of the customer’s financial stability for you to consider. You are not your customer’s banker; you are extending credit privileges and have a right to ask questions so that you can determine whether the customer is worthy of that privilege.
2. Bank Account
Find out who the customer banks with and what its bank account details are. This information can be useful in the event of default and when you may be trying to recover your debt by garnisheeing the customer’s bank account.
3. History of Insolvency
Ask about whether the customer has ever been made bankrupt and, if so, the circumstances surrounding past insolvency. Bankruptcy is not uncommon but ideally the causes have been overcome and will not cause similar issues in the future.
By strengthening your Credit Application as much as you can, the Credit Application will work for you (not the other way around):
1. Information about the Owners
If the applicant customer is a company, trust or other type of agency, make sure you get information about the individual directors or owners. This will allow you to do more searches on the individuals behind a business, and help you decide whether to ask for a Personal Guarantee.
2. Industry Knowledge
You should ask whether your customer has any credit accounts (or applications) with other suppliers in the same industry. Often a customer who is struggling will go to another supplier and try and open a new account, rather than pay the existing supplier. You do not need a non-paying customer, let them cause someone else some grief and look after your existing loyal customers first.
3. Don’t rule out the spouse
Ask for the full name, date of birth and home address for the spouse of each owner. It’s common for people to go “missing” when the account stops being paid, so this will give you a known address and contact details if you need to locate your debtors. The full name and date of birth also helps you to distinguish common names.
4. Take warranties
To shut down common arguments about staff members or other unauthorised people signing contracts, ensure that you obtain a warranty from the person signing the Credit Application that they have the business’ power and authority to do so. Also ensure that the person signing the Credit Application attests to the accuracy and truthfulness of the information they’re providing – if it’s not, they could be personally liable for any indebtedness caused by their incorrect statement.
Overall, the value of receivables is often one of the largest assets on a balance sheet and it has to be managed. Lowering DSO’s and minimising bad debts is critical, but successful businesses know that the real cost of a bad debt is based on your net profit margin. If your margin is 10% and you write off $1,000, it will take $10,000 worth of sales just to get you back to square one. Trying to get paid is not the time to realise you could have done more at the very beginning to protect that asset far more effectively, if only your Credit Application had been more thorough.