Credit Application Best Practices To Get You Paid

Customer Credit Safety

We all want customers and we go to great lengths to keep them happy.  One of those lengths is letting customers pay for products in 30, 60 or even 90 days.  It is important to remember that when you do this you are lending your money to your customer. 

Here’s How to Safely Extend Credit to Your Customers

Here are six steps you should follow to make sure that lending your money to your customer is a sound business decision. 

• Get the customer to complete a credit application

1. Identify the customer’s legal name, business address, website, telephone number and any other contact information so that you know who you are lending to and so that you can find the customer in case you need to sue.  You may be delivering products to a different location or company and you may get paid by a different company.  Make sure you know exactly who you are advancing credit to.
2. Identify your customer’s bank and branch.  If the customer doesn’t pay and you get a judgment you need this information to be able to enforce.  You will also want the customer to tell you what their bank balance is, what their credit limit is, how much they owe and whether they pay regularly and to allow you to contact their bank to verify this information.
3. Collect references from your customer.  This will be a list of other supplier who supply on credit, how much credit they advance, what the payment terms are and how quickly the customer pays.  Make sure you have contact information and consent to contact the suppliers.
4. Get copies of recent financial statements.  If the customer is reluctant to provide financial information (or references or banking information) this is a red flag.
5. Check your customer’s business history. That is, find out how long your customer has been in business and how long they have been with their bank and the suppliers (references).
6. Get consent to perform a credit check.  You cannot perform a credit check without written consent.

• Assess creditworthiness

1. From the credit application, you should have financial statements, references and details about the customer’s existing credit. The first step will be to analyze the financial statements and speak to the customers existing lenders – both banks and suppliers. Are they happy with the customer? And more importantly, is the information the customer gave you consistent with what the other creditors are saying?
2. If the customer looks good at this point, consider further searches.  A credit report can give you an idea of the customer’s borrowing habits to date. A PPSA (security) search can tell you what other debts the customer has and whether the customer owns the assets. An execution search can tell you if there are any judgments against your customer.
3. Other considerations:

• i.How long has the customer been in business? If not long, was the customer operating using a different name/company? Why did the customer close the old company? The customer may have formed a new company to avoid creditors. 
• ii.Google the customer and the principal of the customer. For example, you may get positive or negative reviews which you can use as part of your credit decision. 
• Set smart credit limits and payment terms

1. Decide how much credit you should advance to the customer and for how long – then stick to this!
2. Deciding how much credit and what the term should be will depend on a number of factors:

• i.What risk you are prepared to take on?  The longer you wait to be paid, the higher the risk that something will go wrong and the customer won’t pay
• ii.How long you are prepared to wait to be paid?  Extending the time to get paid will affect your cash flow and force you to operate using your own line of credit – which you have to pay for!
• iii.What is the industry standard?  You still have to be competitive but there is no point in being so competitive that you run yourself out of business.  Its better not to have a customer than to have a customer who doesn’t pay. 

      3. If the customer looks promising but you have some concern, keep the payment term short – say 15 days – and keep the amount low.  Then, as your confidence in the customer builds, increase the term and the amount.

• Consider other forms of security

• Guarantee
• i.Getting a guarantee from the owner of the business gives you another pocket if you have to sue. More importantly, if you have a personal guarantee you ensure that the principal stays involved in the business even if it is struggling. It is more difficult to walk away from a struggling business if you are personally on the hook for its debt.
• Security interest
• ii.Ideally, if you are lending you get a security interest in all of the customer’s assets. If the customer doesn’t pay you can seize all the assets and sell them to recover your debt. However, this may be impossible. The customer may have an operating line of credit with a bank which will be secured against all the assets. Even if you get security you will be behind the bank. In this case you can still get security in the specific product you are delivering and that security will rank ahead of any other lenders, including the bank. This is called a “purchase money security interest”.
• Use a clearly worded credit agreement

1. The credit agreement will set out terms such as:

• i.The legal name of the customer;
• ii.The amount of credit being advanced;
• iii.The amount of time the customer has to pay; and
• iv.The maximum amount of time to report quality or quantity issues.

1. Make sure the credit agreement clearly says that you have the right to cancel credit at any time and for any reason whatsoever. If the customer’s financial situation changes you don’t want to be forced to continue supplying on credit. 
2. If you are getting a guaranty or a security interest make sure these are in writing and signed. The security agreement has to be signed by the customer. The guarantee has to be signed by the person giving the guarantee. 

• Get regular updates

1. Your initial decision to give credit will be based on all of the information above — but circumstances can change. Your client should regularly update all of this information so that you can reassess whether you should advance credit. You want to make sure you catch the customer’s problems before they become your problems. 

Advancing credit to customers is a regular part of business.  With these tips you can make sure you make the right credit decision.  If you provide credit and want to make sure you are protected, call us to review your processes.  And if you have a customer who is not paying, we can help you sue to recover the money owed to you. 
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If you have any questions relating to this article or wish to discuss your particular concerns, you may reach the author at wjaskiewicz@kmblaw.com or (905) 276-0424