How to Decide Whether to Give Credit to a Customer

Sam White

January 29, 2025

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

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Best Practice Guide

In the excitement of getting a new customer, it’s 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 - “It doesn't count until it's in the account”. 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 ‘trade as’ 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 doesn’t 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 you’re 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 CCJ’s entered, announcements of businesses going into administration and company name changes and all for free.

Credit reports are available from a number of suppliers and provide you with financial information and a simple risk rating. 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 client’s 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 CCJ’s as well as the payment performance.

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 don’t 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 doesn’t 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 you’ve 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. Don’t be embarrassed to speak frankly about your decision, they’re probably used to hearing it (despite protestations that such and such company gives them £200k).

Remember, it’s 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.

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How we can Help:

Outsourced Credit Control Service

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FAQs

Find answers to common questions about our debt collection and credit control services.

Why is a credit account application form important for new customers?

A credit account application form is crucial because it helps you verify the legal entity behind the order, ensuring you know who is responsible for payment. It allows you to assess the financial stability of potential customers and understand their payment behaviours through credit references. Additionally, it secures formal acceptance of your terms and conditions, giving you a stronger position in case of disputes or delayed payments.

What details should a credit application form include?

A credit application form should collect the registered company name, number, and address, along with a separate invoicing address if applicable. It should request financial details such as turnover or balance sheet totals and ask for contacts for credit references. Finally, it should include a section for the customer to acknowledge and sign your terms and conditions, confirming their acceptance.

How can I mitigate risks if a customer’s creditworthiness is unclear?

When dealing with a new customer whose creditworthiness is uncertain, you can request part or full payment upfront for their initial orders. Alternatively, you can set a limited credit amount and monitor their payment reliability over time. This approach allows you to gradually build trust while minimizing financial risk to your business.