Commercial Credit Application - How to construct a meaningful one.
Puru Grover | Credit Guru Inc. ©
Request for credit generally begins with the completion of a Credit Application. This information in most cases is procured by the Sales Representative for the Credit department to make decisions in setting the credit terms and conditions. It is a direct source of information and its quality and dependability is directly proportional to the quality of interview with the subject. The application also extends the information gathering process by seeking the applicant's Bank and other Trade references. The application can also request financial statements. Financial statements can contain inaccuracies or questionable information but it also helps in corroborating information provided by the applicant on the credit application or through the Sales representative.
Generally all the accounts should be opened after receiving and evaluating a satisfactory Credit Application. A well-reviewed account will help save valuable time in attempting to either collect or enforce in the event of a default.
A Credit Application serves the following purposes:
•It is an information gathering tool
•It is an assessment tool to determine amount and duration of credit
•It is a collection tool
•It is a legal document that binds the applicant to your terms and conditions
•It is an enforcement tool
•It is a monitoring tool. Revisit the credit applications of your important customers
•It is a marketing tool that markets your loan. In essence a 'loan application'
If you are in the process of designing a credit application or reviewing your existing one, then here are the important issues to consider.
•What is the information that you require from the applicant for you to assess the credit worthiness after supplementing it with other credit information resources like a credit report?
•What are the terms and conditions of credit and sales that you want the applicant to adhere to?
•What are the legal disclaimers that you would require to conduct the credit investigation?
Does the customer find the process simple and easy to comprehend and at the same time understands why the information is required?
As a commercial creditor here is a list of factors that would require attention in drafting a Credit Application:
1.Legal Name: Ask for the legal name of the applicant first on your Credit Application and then ask for the 'Trade style' or 'doing business as'. The company can operate under different Trade names but will have only one 'Legal' name. Thus it is important to sign-up the company with its legal name.
2.Type of Business and Industry: Which industry does the applicant belong to and whether the applicant is in a) Retail b) Service c) Wholesale d) Manufacturing This information will help in evaluating the risk that you are dealing with. Typically there are a lot more business failures in a particular industry and especially in the area of Retail and Service.
3.Type of Product or service the applicant supplies: This will also help in determining if the applicant's products will compliment and supplement the product or product line that the applicant is seeking to purchase from your company.
4.Style of Business: Whether the business is a a) Sole Proprietorship b) Partnership c) Limited liability Corporation. In the case of a Sole Proprietorship and partnership the liability extends to the individuals running the business and thus it becomes important that the personal information of the principals along with their full names, home address and telephone numbers are sought on the credit application.
5.Number of employees:
6.Estimated Annual Sales: Number of Employees and Estimated Annual Sales not only gives an idea of the size of the applicant but also helps evaluate the 'sales to employee' ratio that would indicate if they are over or underemployed.
7.Number of years in this business: It is important to ask 'in this business'. Obvious reasons being that the applicant could have in business for a long time but could have only recently started this or the current business.
8.Bank Reference: Ask for a 'borrowing account'. Get the account numbers and also the Account Manager's name. Some even insist on a copy of a void check/cheque. This helps in a round about way to substantiate the company's legal name.
9.Trade References: Normally three references are asked for. However, asking for more than three could further test the credit worthiness of your applicant. If possible ask for one Trade reference from your industry. This could indicate if the applicant is coming to your company after having shortchanged another from your industry.
10.Web site URL and Email address: Email address is a vital tool of communicating and can aid quick collection and transfer of documents especially when a customer claims that they have not received the invoice.
11.Signing officers and accounts payable contacts: email, telephone and fax numbers.
12.Authorized Signature: The credit application should be signed by someone who is authorized to do so. It should then bear the person's title the date and place.
13.Terms and conditions: The credit application should bear the terms and conditions of sale.
14.Disclaimers: Some of the important considerations in writing your disclaimers would be as follows:
a. Permission to do a check with the applicant's bank/financial institution and trade references not just at the time of setting up of the account but from time to time.
b. If you need to check the personal credit history of any individual or principal then you would require their permission in writing. If you are making provisions for 'Personal Guarantee' then make sure that your state/provincial laws do not require that to be notarized and as a separate addendum.
c. Statement that upon signing the information that has been provided is certified to be true and correct and that it will be used and based to make the credit decision.
d. The applicant will be bound by the terms and conditions on the Credit Application whether on the front or reverse.
e. That a faxed application will be deemed as original
f. A statement of interest to be charged. Certain jurisdictions might require this as a separate addendum. The allowable rate could also vary. Check with your attorney regarding the state/provincial laws
g. Discounts and the definition of overdue.Discounts and payable dates.
h. Statement that no oral agreements or modifications will be accepted or effective.
i. Statement that in the event of dispute the laws of which state or province would apply and in which state would be the forum for the court proceedings.
j. A statement whether the attorney fee or collection cost will be added on to collect past due accounts.
Your lawyer should review the final draft of your credit application.
[Visit our Downloads page to download a Sample Credit Application]
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