Tuesday, 07 February 2017 12:53

How To Use a Credit Limit Application Form

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In the B2B world, practically every enterprise will extend credit to a client or customer at some point or another.

For vendors and resellers, credit facilities are a familiar part of payment terms. But even service providers will regularly be in the habit of extending credit to clients - remember, time is money, and any work you do before the first payment date can be considered as credit.

In other words, unless someone pays up front, you are extending them credit. And the golden rule of credit is to do take every reasonable step to ensure the debtor can pay before you agree to extend them credit.

Credit Limit Application Forms are one such step. By asking the debtor to formally apply to the creditor for credit, the customer is made to provide a wealth of information that the creditor can use to ascertain if the client really is who they say they are, and to identify what level of credit they can support.

Ultimately, it puts the creditor in a stronger position to make a credit decision, or to negotiate different or preferential terms. You can find an example credit limit application form here .docx and .pdf.

When should I use a Credit Limit Application Form?

Introducing credit applications is worth considering if any of the following apply to your business:

  • If you have experienced problems with payments on several occasions in the past.
  • If cash flow is tight and your business will be exposed to significant risk in the event of delayed or non-payment.
  • If you think your business or sector is particularly vulnerable to non-payment (for example, how tight are your contractual arrangements?)
  • If you have reason to suspect a potential client poses a risk of not paying.

If you do decide to use credit applications, integrate it fully as part of your credit control procedures and make sure potential customers are aware that this is a part of the process.

credit limit

What should I include on a Credit Limit Application Form?

The level of detail you include on an application form should be influenced by your clients. For smaller accounts, it may not be worthwhile (or even come across as intimidating) to make in-depth demands; on the other hand, the larger the account, the more risk extending credit carries, so you are justified in covering all bases.

Key information to request includes:

Company Details

For a limited company, limited liability partnership (LLP) or publicly listed company (PLC), ask for the details they are obliged by law to provide on all written correspondence:

  • The full name as it was given when incorporated
  • The company’s registered number
  • Its registered office address

For sole traders and unincorporated partnerships you need to identify:

  • The full name of the sole trader or partners of the business
  • The trading address of the company
  • The home address of the owner or partners

This will help you identify the exact legal identity and status of your customer and give you the information you need to start assessing your customer's credit request.

Contact Details

It is good practice to ask for a ‘named person’ to serve as the primary point of contact. Ask for the usual contact details - telephone number, email.

Getting these details now is considerably easier than trying to get them if you have a payment or payments outstanding, so make sure these are included at the outset.

Credit Sought

The common practice is to ask an applicant to specify the credit limit they would like to work to - in effect, how much they can afford - and then work negotiations from there. This is not a hard and fast rule, and you can set a fixed credit limit if you are particularly concerned about exposing your business to greater risk.

Alternatively, you may decide to decide on the credit you are comfortable in extending to this client. If that is the case you can leave this off the form and make a decision based on the information your credit vetting turns up.

Payment Details

Ask the client how they intend to pay, and ask for account details in advance to keep on file. These should include contact details for their accounts department, if relevant.

References

The critical part of a Credit Limit Application is how you assess its validity - in other words, whether you think they will pay based on the information they have provided. You can request one of two types of reference:

  • Business/Trade References: Ask the applicant to provide details of at least two current suppliers who, with their permission, you can approach to vouch for their credit history. Be aware that you have no way of being certain whether any such reference is truthful or not - asking for two or more reduces the risk, but does not remove it completely.
  • Bank References: With the client’s permission, you can apply to their bank for what is known as a ‘status enquiry’. You will probably have to pay a fee, and you will only get a short statement about the business’s ability, in the bank’s opinion, to meet the requested payments.

Background Checks

Finally, the information supplied on an application form is only worth the paper it is written on. You can make a decision based on what has been supplied, or you can use it to conduct further checks. Such a form will give you all the information you need to get a credit report, which will give you verified information about any company’s credit history.

If a customer or potential client balks at providing the information requested, or otherwise tries to circumvent supplying the details think long and hard about allowing any credit. After all if your customer needed the credit like they claim, they should be happy to provide the details you need to verify their financial good standing.

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