What Goes in a Business Credit Application?

Obtaining a signed credit application should be an integral part of the process of extending credit to a customer. The application provides information necessary to determining the risk of not being paid in a timely manner (if at all) and to establish a credit limit. More importantly, it gives you permission to contact bank and trade references and agrees to your terms of sale. I discussed the credit review process at length in a previous article but wanted to provide more detail on the content of a credit application. 

A credit application should contain the following information.  A template application is available as a Word document Sample Credit Application.   You can tailor it to your company’s requirements as necessary.

  • Customer Information
    • Legal name of business
    • Business address
    • Billing address (if different)
    • Business phone, fax and email
    • Incorporation date and length of time in business
    • Owner name(s)
    • Customer financial information
      • Amount of credit requested
      • Annual sales
      • Most recent full year financials or tax returns available?
      • Bank information
        • Bank name and branch address
        • Account number
        • Bank contact name, phone & fax numbers
        • Trade references (ask for three)
          • Name, address, phone and fax numbers
          • Signature block and legal notice
            • Owner or authorized party must sign and date application
            • Language to certify that signer:
              • Declares information provided is correct
              • Authorizes contact of references
              • Accepts any terms & conditions pertaining to the sale (e.g., late charges)

You may want to go even deeper in some cases and ask for information such as Tax ID, state of incorporation or SIC Code but the primary purpose of a credit application is to get permission to contact references.

Once you have permission to contact references you need to do so.  I recommend you call the bank reference since a company’s banker should be in the best position to give you an overview of the health of your prospective customer.  Trade references are often contacted by fax, with their responses returned the same way.  A trade reference request should include the following questions.  Again, a template request is available as a Word document Sample Reference Request.

  • Date account opened
  • Credit Terms
  • High credit:
  • Current balance
  • Amount past due
  • Average days to pay
  • Date of last order
  • Additional comments or information
  • Signature and date

Please keep one thing in mind.  You need to independently verify the existence of the customer. A completed application could still contain fraudulent or misleading information and references are chosen with intent. Google is your friend. Search for and confirm the customers address and phone number. Call the number if you have any concerns and tell the person who answers that you are calling to verify the billing address for a new customer.

Anytime Collect Credit & Collections Management Software Independently Certified for Intuit QuickBooks

Chardon, Ohio, June 14, 2011 – e2b software (www.e2bsoft.com) announced today that its cloud-based Anytime Collect credit and collections management solution is now a Silver Certified Solution for Intuit QuickBooks. Anytime Collect has passed an independent QuickBooks Technical Review administered by Intertek to ensure that it meets the high quality standard of operation and compatibility expected by QuickBooks customers.  By virtue of receiving Silver Certified status, Anytime Collect is now available on the QuickBooks Marketplace (http://marketplace.intuit.com) available to QuickBooks users worldwide.

“Our goal is to make accounts receivable collections simple and affordable for smaller businesses.  That’s why we went through the process of certifying Anytime Collect for Intuit QuickBooks,” said e2b software President Bill Henslee.  “Anytime Collect is a cloud-based solution which is easy to deploy and requires virtually no IT resources.  It is priced right for smaller companies and it’s easy to use with a Microsoft-centric design and wizard-driven communications tool.”

Smaller businesses often do not have a full time resource to focus on receivables management and accounts receivables collections.  The Anytime Collect Communications Wizard helps companies manage collection processes and communications such as emails, phone calls, disputes, and other activities.

Anytime Collect helps businesses make accounts receivable collections easy while reducing days sales outstanding (DSO), minimizing bad debt write-offs, improving operating efficiency, decreasing credit financing costs, and improving cash forecasting – all with minimal IT requirements.

About e2b software

e2b software (www.e2bsoft.com) develops, sells, and supports Software as a Service (SaaS), cloud-based business applications including Anytime Collect (www.anytimecollect.com) credit and collections management (CCM) software. Anytime Collect integrates with popular accounting software enabling finance professionals to reduce outstanding receivables, track collections activities, automate communications, forecast payments, and effectively manage disputes.

Anytime Collect – Because we knew there was an easier way to collect A/R 

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Prioritizing Collection Activity — You Can’t Call Them All

Two things are true for most businesses: a significant percentage of sales (and therefore receivables) are concentrated in a small percentage of customers and they have insufficient staff resources to contact every customer about past due payments. I suggest adopting a collection strategy that identifies priority accounts for ongoing personal attention and uses efficient automated processes to contact the others.

Start by creating a “Top 20” list that is composed of these priority customers. Usually about 20% of your active customer base accounts for 80% of the activity and you should focus your limited collection resources on these customers where personal contact will have the maximum impact.  The number of customers on the list will be determined by your available staff resources – how many relationships can they manage given the time they have available for collection activity?

Create the list by evaluating accounts across several dimensions: 

  • Account balance.   Obviously, large amounts are your primary focus.
  • Payment history.  Are they slow and erratic payers or do they pay consistently without the need for reminders?
  • Purchase history.  You have more leverage over customers that purchase frequently and who may be dependent on your for products or services that are critical to their business.
  • History of interactions.  Are they easy or difficult to work with? As painful as it may be, limited resources should be directed at the tough collection situations.
  • General collection risk.  A high-level assessment of a customer’s ability to pay based on their industry and location will also come into play.
  • Specific collection risk.  Likewise, company information (e.g. length of time in business) is also a predictor of collection rise.
  • Profit margin on sales.  Low margin accounts are high priority because carrying costs erode profit so the sooner you collect the better.

Determine who is on the list by analyzing aging reports and history of customer activity and interactions. A collections automation tool like Anytime Collect would be helpful in large, dynamic environments by bringing all this information together in one place.  The actual number of accounts that can be managed will depend on the collections staff resources available. The list should be reviewed at least quarterly to reflect changes in your account base (new customers coming on board, old ones that stop buying)

Once you have the list you can start managing collections more effectively.

  • Learn about them.  Document their purchasing and payment history. If they are a large company that always pays in 60 days set that as your expectation. If they have specific paperwork requirements to get an invoiced processed through their system be sure the people in your organization that do the billing are aware of them.
  • Identify key personnel.  Identify and build relationships with the individuals at each customer who are involved in the payment process – AP clerk, approving managers, CFO/Controller, etc.  Obtain accurate contact information and determine their preferred mode of contact.  Some people prefer email, others like faxes or phone calls.
  • Establish policies for collections. I have talked about collection strategies and variations on those strategies in previous posts. Be open to establishing highly customized strategies for collecting from your largest customers. Adapting to their procedures and protocol will be a big help in moving paperwork through the system.
  • Monitor changes in payment or purchase activity.  A slowdown in payments could be a signal of financial trouble at this customer and bears watching. Large purchases that are outside of previous practices should also be watched. Pay particular attention to new customers that suddenly make a significant purchase. Call before and invoice is due in these situations to verify that it is legitimate and will be paid in due course.

Automate contacts with the 80% of customers who are not on this list.

  • Identify key personnel.  As above, identify the individuals at each customer who are involved in the payment process.  Accurate contact information is essential. It is important to know that messages are getting to the right person.
  • Establish policies for collections.  As above, define specific actions to be taken at milestones in the collection of a past due account. If possible, use an automated process to identify past due invoices on a daily or weekly basis. Remember, you don’t have to follow up past due invoices at 30-day intervals. Particularly as they get older more frequent contact is appropriate.
  • Standard document templates.  Develop a series of standard collection documents with specific and escalating messages to support collection actions. Ideally, these can be sent out through a mail merge process.
  • Vary communication methods. Alternate the method of communication (email, letter, and fax) in order to maximize the likelihood that the message will get to the intended recipient.
  • Monitor delivery failures.  Investigate any communications that bounce. Personnel turnover or transient technical issues can lead to an email not being delivered and a follow up call is in order. Returned mail is a serious issue and requires immediate escalation.
  • Consider outsourcing.  Many third-party collection agencies are expanding their services in this area and can represent you as a first party for these non-critical accounts.  Generally this entails a fixed cost per account or invoice and the customer is not being put in “collection”. You keep 100% of the payments collected but there are no guarantees – you pay for the service regardless, although economies of scale make it possible for large agencies to perform these routine collection activities for much less than you could yourself. Automated phone calls are often an option from these sources and provide another mode of contact.

Another way to cope with limited resources is to send accounts to collection earlier. If your internal efforts are not working, call in the pros and stop wasting your time. That frees up time to be directed towards accounts where the interaction can make a difference. This applies even to priority accounts, though you may want to take care in referring such a customer. However, a good agency should be able to get payment from a customer without blowing up the relationship. When you are considering engaging an agency make sure that they have experience in commercial collections.  The techniques used for collecting consumer debt do not all carry over well to collecting from a business.