Offering Terms Accounts to Your Customers:
The Credit Application
If you do business-to-business sales you may offer term accounts, rather than requiring payment up front. Although this may make it easier to attract new customers, it can also cause cash-flow problems and bad-debt write-offs. If this happens too often, your own business may be put at risk.
How do you strike a balance between the two, so you can maximize the benefits to your business while minimizing problems?
It starts with a credit application, but you also need a system for monitoring accounts receivable and following up with slow payers.
Confidentiality of Credit Applications
Massachusetts 201 CMR 17.00 states that any document which contains a person's name and social security number, driver's license or other state-issued id number or bank or credit card numbers MUST be secured against unauthorized access. Credit applications should be kept in a locked filing cabinet or other secure location. Only the person performing the credit check or authorizing a credit line should have access to them. When you no longer need a credit application, it should be shredded. Other states may have different laws (or none at all) regarding credit applications, but in general the information they contain is confidential and should be treated as such.
The Credit Application
- A good credit application should help you decide whether or not to extend credit, and provide the information needed to legally collect what you're owed if a client defaults or goes out of business and you have to take them to court.
- Legal Form of Business - Is this a corporation, partnership or sole proprietor? If it's a corporation, you need to know the correct legal name. If it's a partnership or sole proprietor, or you are requiring a corporate officer to sign a personal guarantee, you need the owners' or officer's legal names, home addresses and social security numbers, as well as the business name, address and tax id.
- How Long Have They Been in Business - A long-established company is usually a better credit risk than a start-up. This doesn't mean you shouldn't extend credit to a new business, but you may want to limit their credit line until they establish a good history with you.
- Authorization - Who has authority to place orders? Are purchase orders required? If you don't have this information, an employee can place an order and the company may tell you they're not paying for it. You can avoid this by getting a list of people authorized to place orders on the company's behalf, or calling to confirm if an order seems unusual. Also note that many large companies, town or government agencies and school departments won't pay a bill at all if there isn't a purchase order to go with it.
- Billing Information - Where should bills be sent? What is the contact information for the bookkeeper, A/P department or person who authorizes payment or signs checks? You'll want this to make sure you send bills to the right location, and know who to contact if something hasn't been paid.
- Credit References - Ask for credit references (at least three). If they can't provide credit references because they are a new business, decide what other kinds of references you'll need, and get a personal guarentee. A personal guarentee means that an individual is accepting responsibility for payment if the business defaults, so you may also need to run a credit check on that person.
- Financial Information - Get the business bank account information, including the account number. Include a section on the credit application giving the bank permission to speak with you about the account.
- Exempt Information - Until a customer provides the proper tax exempt information, you should charge sales tax if your state requires it. For non-profits doing business in Massachusetts, this includes a completed and a copy of their tax exempt certificate or most recent letter from the state with the date their certificate expires. For Massachusetts resellers, you need a completed , but do not need a copy of their certificate (they never expire for resellers).
- Credit Line - How much credit are they asking for? Whatever you approve, your bookkeeping software should be set up to alert you if they exceed it. You should also set a minimum credit line internally (but probably not on the application because you want to stay flexible). If someone wants only a few hundred dollars in credit, ask yourself if they need a credit line at all. Maybe it makes sense based on your business and theirs, or maybe it's an indication they won't be purchasing enough to make setting up a credit line worth your time and risk.
- Updating - Your credit application should state that in order for an account to remain active, an updated credit application is required annually. Pick a month each year to mail new applications to all current accounts. This will let you know if any contact information has changed, get updated non-profit tax-exempt information, etc.
- Payment Terms and Conditions - Your credit application should clearly state your payment terms and conditions, including late fees and interest. You might also include a statement that late accounts become COD until brought current again, and that credit lines may be reduced or eliminated at any time.
- Signature - Depending on your business, you might require a personal guarantee from the person signing the credit application, stating that they will take responsibility for any bills the company doesn't pay, and an authorization from them to perform a personal credit check. At a minimum, the signature area should say that by signing the application the person is certifying they are authorized to request credit on behalf of the company, that they agree with the terms of the credit application and that all information is true to the best of their knowledge.