When developing a credit application for customers, it is important to keep in mind that at the point of application, your company holds the leverage in the situation because you can deny their application for goods and/or services. The purpose of obtaining a credit application from a customer is to establish a contractual relationship between your company and the customer. It also gives your company the opportunity to obtain critical customer information, including addresses, phone numbers, employer identification numbers (EIN), Social Security Numbers (SSN), business structures (corporations, limited liability companies, partnerships, etc.), and credit references. This information could prove to be critical if the customer fails to pay, as it will assist you in your lawsuit and collection activities.
Once your credit relationship with the customer has been established, your leverage over the customer will diminish. They may have already secured what was wanted – your goods and/or services – and therefore will be less inclined to provide you with information about their operations.
The structure of your company’s credit application will help to make certain that the customer information you obtain is complete and accurate. While most every credit application contains common fields such as the customer’s name, mailing address, and credit references, you should pay particular attention to the following fields:
1. Customer’s Name
This field seems straightforward, but it can be easy to get misleading information regarding your customer’s name on a credit application. Be sure to refrain from asking for the name of the customer’s company or corporation as it may imply that the customer should use a corporate name even if the customer is not a corporation. Instead, include a checkbox or some other field following the name field to ask if the customer is a corporation, LLC, LLP, partnership, sole proprietor, or other. It may also be helpful to ask if the customer has a website, and if so, have them list a domain.
2. Customer’s Address and Telephone Number
A little bit of extra attention to this field can garner a lot of useful information. Typically, customers will have a physical address and a mailing address as well as a business telephone number and a mobile number. Asking for both addresses and telephone numbers could prove very helpful should you have a hard time getting in touch with the customer later.
3. Customer’s Employer Identification Number (EIN)
Some customers may be unfamiliar with the acronym “EIN” and instead know it as a “TIN.” Asking for their “EIN/TIN” can be helpful in communicating exactly what information you’re looking for.
4. Customer’s Bank Information and Credit References
In this field, you should make sure to ask for all the banks at which the customer has an account, and ask for specific branch addresses. Be sure to get the full account number for each bank account listed by the customer. Additionally, it’s best to ask the customer for at least three (3) credit references. Include fields for the name, address and telephone number for each credit reference. Also include a field that asks for the name of the person at the credit reference to whom your inquiry should be directed.
5. Guarantor’s Name, Address, Telephone, Social Security Number, Etc.
Your company’s credit application should not also be a guaranty agreement. Instead, you should have a credit application and a separate guaranty agreement. By separating the credit application from the guaranty agreement, you remove the risk that the signature line of either the credit application or the guaranty agreement will be executed incorrectly. You also take away the customer’s argument that he or she did not understand the credit application to also be a guaranty agreement. Instead, simply ask the guarantor for the following information:
– Full name, business address and home address (separately)
– Business/home/mobile telephone numbers
– Social Security Number
– Driver’s license number
– His/her position with the company that is applying for credit. Do not offer options, such as president, vice president, or secretary; let the guarantor fill in the blank.
– Email address
6. Signature Line
It is difficult to construct a single signature line that is appropriate for all types of business entities; therefore, your company’s credit application may need to have multiple signature lines to accommodate all of the various entities that may submit a credit application. For example, a corporation has certain officers, such as its president or secretary, who are authorized to execute documents on its behalf. A limited liability company, on the other hand, has a certain manager(s) or member(s) who is authorized to execute documents on its behalf. No matter what type of signature line is contained on your company’s credit application, make sure that there is a date field included.
7. Interest and Attorney’s Fees
Make certain that you include language giving your company the right to collect interest and attorney’s fees from the customer if the customer fails to remit timely and full payment. It does not have to specify a particular amount or percentage of attorney’s fees (it may simply state that the customer will be responsible to pay your company’s reasonable attorney’s fees), but it should, however, specify a particular amount of interest that will be charged to the customer if the customer fails to remit timely and full payment.
Creating a viable credit application document is only part of the process; you must also determine the credit worthiness of the customer. It is important to review your customer’s completed credit application thoroughly. Here are a few of the best practices for application review:
1. Confirm that the Customer’s Name is Correct
To confirm your customer’s name is correct and that the customer is qualified to transact business in the State of Alabama, visit the website for the Alabama Secretary of State. This site is where you’ll be able to find if there is an entity with the exact name as listed in the credit application and ensure that the customer is who they claim to be.
2. Check UCC (Uniform Commercial Code) Filing Information
While you are at the website for the Alabama Secretary of State, you may find it useful to check the UCC (Uniform Commercial Code) filing information for your customer. This information will allow you to determine if your customer has given a security interest in its personal property (accounts, inventory, equipment, virtually anything other than real estate) to a lender. If the answer is yes, the customer likely has an account with the lender and you can follow up with the lender before extending credit to the customer.
3. Google Your Customer’s Name and Address
As simple as this seems, it is a very important step in making sure that this information is correct and verifiable. Performing a basic Google search on your customer’s name (as it appears on the credit application) and city could potentially provide you with additional phone numbers not listed on the credit application, as well as business reviews (in certain cases) that could be helpful.
4. Follow Up with Credit References
Don’t hesitate to follow up with all credit references that the customer lists on your application. It is important that you take your time and ask questions that will help you identify the customer’s payment and business history. During this time, also follow up on any additional leads that you may have uncovered earlier in the review process.
5. Correct Any Errors in the Credit Application
Do not wait until after your company has extended credit to correct any errors in the credit application as doing so will cause you to lose your leverage in the situation, and you may never be able to get correct information.
In addition to establishing the contractual terms between your company and its customer, a credit application provides your company with an excellent means of obtaining the information that your company will need if the customer fails to pay for the goods and/or services it purchases or otherwise does not live up to its contractual obligations. It may not seem important to document your file with the information that you will need to recover from that customer if he or she later fails to pay, but there will likely never be a better opportunity to acquire this information. Make it a priority to review every credit application that is submitted and follow up with the customer and third parties to verify the accuracy of the information.