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Credit Account Application Forms - Who are you Doing Business With?

Best Practice Guide

In the excitement of getting a new customer, itís easy to jump straight in and start trading with them without thinking too hard about whether they are a good credit risk or not. But remember - ďIt doesn't count until it's in the accountĒ. A sale won is worthless if the customer never pays for your goods or services and you have to write it off as a bad debt.

Having a robust process to assess whether a customer is creditworthy and to decide how much credit to extend is an essential part of a well-run credit control function and could save you a great deal of money in the long run.

Before lending your money to a company, send them a credit application form to complete. The key goals of a credit application form are as follows.

1. Finding out exactly who you are trading with

You need to know all about the legal entity (company) you are actually doing business with. Many companies Ďtrade así a marketing name and have a different legal name. Some companies are structured as groups with legal separation from the different (sometimes similarly named) parts of the business.

You cannot assume that the order you got is from the large company in the group whose swanky offices you went to visit, they may have placed the order from a smaller, financially struggling business in the group. Just because businesses are in a group doesnít mean that one part of the group can't be put into administration owing money to suppliers.

Even if the order you have received is on a formal written order and not an informal order over the phone or by email, the document may not contain all the information you need. Your credit application form should ask for the registered name, company number and registered address of the legal entity behind the order, and ideally the names of at least a couple of the directors. Also ask for the invoicing address as this can often be different from the registered office in larger companies.

2. Understanding their financial size and stability

On your account application form you can ask for financial information such as turnover in the last years accounts, number of full-time equivalent employees and balance sheet total. This will at least give you a sense of the size of the business that youíre planning to trade with.

Once you know the proper legal name and company number you can search up their financial information.

You can do this at Companies House company search. Information such as current officer details and registered officer address and financial accounts are all available for free. The drawback is that these reports are historical information, and depending on timing, sometimes the most recent information refers to nearly two years ago.

Another good source is the London Gazette. This lists any CCJís entered, announcements of businesses going into administration and company name changes and all for free.

If youíre not a financial whizz (and even if you are) you may find our credit checking service a more useful approach. Some of these work on a subscription where an annual fee gives you the ability to download reports on companies creditworthiness, others operate on a pay as you go basis.

These reports distil a whole range of financial information (and risk factors) into a credit score and a recommended credit limit. Some products even collect information on the payment performance of companies through integration with their clientís accounting software so you can see if the company pays later than the industry average or if their payment performance is declining or improving over time. Most now give real time information, latest CCJís as well as the payment performance.

Credit Check Reports

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3. Finding out whether they pay invoices on time

You can also use your form to request credit references from other suppliers. On your credit application form ask for contacts for at least two suppliers who are willing to give a reference.

Upon receipt of the completed credit form you can send a template questionnaire to the referee asking for the following details:

  • How long they have traded together.

  • The credit limit they have given the company.

  • To categorise payment performance as either prompt / >15 days / >30 days / >60 days late.

Unfortunately some companies refuse to give these references, and the fact that the company can select which suppliers to put you in touch with means you might not be getting the most independent view of their performance, so donít use references alone to form your opinion.

4. To Prove Their Acceptance of your Terms and Conditions

This is really important. If, despite all your precautions, a customer doesnít pay your invoice you will have put yourself in a very strong position if you can show that the customer accepted your terms and conditions of supply.

Append a copy of your T&Cs to the credit application form and make sure there's a section where the applicant can sign to indicate that they accept your terms.


The Decision to Offer Credit to a Customer

Once youíve got all this information in, you can decide whether to offer credit to the company, and if so, how much. Most companies will understand if their situation does not allow trading partners to give them generous credit terms. Donít be embarrassed to speak frankly about your decision, theyíre probably used to hearing it (despite protestations that such and such company gives them £200k).

Remember, itís not always a black and white decision between doing business with a company or not doing business with them. There are a number of options to explore. You can ask for full or part-payment in advance if the total order value is higher than the credit you can justify extending. An order can be split into smaller consignments or packages to keep within a credit limit.

Trust is earned and not given. You can always review and increase a credit limit over time as a new customer shows that they meet their obligations to pay their bills on time. Making clear that this is your intention can help convince the customer to accept payment in advance for the first few orders.

How we can Help:

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