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Credit Applications: Putting Them to Work for You

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There is untapped power for your company in your credit applications. Improving your application can lead to better sales, grants and of course, collections. But to understand what you want your credit application to accomplish, you first need to understand it’s purpose and the information it encompasses.

Credit Applications: Putting Them to Work for You

1) WHY YOU NEED A CREDIT APPLICATION

The entire purpose of getting your customers to fill out a credit application is to facilitate sales, so it’s a huge help for yourself to immediately begin thinking of the credit application as a sales application. It must help you determine how much credit to grant, understanding that if a customer has good credit, you can extend more credit and actually make a bigger sale.

2) WHAT INFORMATION DO YOU NEED

The first step in creating effective credit applications is making sure you have all the information you would need to start contacting and pursuing a late paying customer. Whatever you do, don’t ask for information you will not use. It’s a waste of everybody’s time. Eliminating the information you don’t really factor in makes the entire process more efficient.

When extending credit, you must have the right frame of mind. You are not a bank, but you are acting just like one. You should aim to obtain the same kind of information a bank would when extending a line of credit to a business. Below are a list of a few examples:

  • The Customer’s Customers – Like a bank, you want to know where businesses are going to be getting the money to pay you back. Find out who your customer’s biggest accounts are. It helps both define the credit limit and in negotiations with your customer. If you know their customers and the problems they face, it simply gives you more insight into their business.
  • Personal Credit History – A customer’s personal credit is usually a pretty good indicator of their business credit. If they don’t keep their personal financial affairs in order, than it is likely they don’t keep their business affairs in order either. To obtain the business owner’s personal credit, you will need their social security number.
  • Landlord and Mortgage Holders – Just like a bank, you will want the information of a business’ landlord or mortgage holder, because if they don’t pay their rent or their mortgage, they won’t be paying you. It’s one of the most obvious warning signs to look for when extending credit.
  • Personal Guarantee and Signature – NEVER HAVE A CREDIT APPLICATION WITHOUT A PERSONAL GUARANTEE ON IT. Without your customer’s written acknowledgement that they will in fact become personally responsible for the outstanding amount if their business defaults, you are losing your most powerful collection tool. Before anything else, make sure this makes the list. To make it count, that personal guarantee, and the entire credit application must have a signature. Without a doubt, it becomes meaningless with no signature.

In creating the credit application, you must consider a lot of questions that are specific to your business: Do you have a large portion of smaller sales or just a few gigantic sales? Are your customers more sporadic buyers or are they pretty routine in purchasing? Keeping questions like this in mind creates a credit application that is right for your business and your customers. However, when filling out the details of the application, always approach a credit application as you should, with the mindset of banker.

 

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