Business credit applications are critical to help businesses assess and manage credit risk because they will, if you use them correctly, help you identify companies who you may want to be careful with when extending credit. Most companies don’t use business credit applications and even those who do use them don’t follow up on them after they’re filled out or ask for the additional information required to truly understand the risk involved, are you?
Learn more about business credit applications below, best practices for follow-up, financial information to analyze, and how to manage these important documents for reduced credit risk.
Business credit applications can be as simple or as complex as you’d like. At the very least, they should require the applicant to give you the following information:
This would be considered a pretty basic credit application, a more comprehensive application will give you a better idea and more confidence in your decision; and that requires more information. For a more complete application, you might want to ask for financial information that will allow you to evaluate the following:
Evaluate the expenses and revenues of the customer, are they making money?
Run the following financial ratios to help determine the financial health of the potential borrower:
Does the borrower have a healthy cash flow from operations, investing, and financing activities? Their cash flow will impact yours, so you want to make sure they have money coming in.
Find out how much debt the potential borrower has and decipher how much they can afford based on the other financial information you’ve seen. If they look like are in over their heads, you may want to be careful about offering credit.
What is the normal debt/liquidity level for companies similar to this borrower’s size in their industry and how do they measure up?
If you decide you do not want to ask for that financial information on your application, you can always purchase a commercial credit report on the potential borrower which would have all of that information included, but that can get pricey over time. Business credit applications should be used for new customers as well as repeat customers if it has been a long time since you last checked their creditworthiness, or if they are asking you to increase their credit limit.
We’ve all done it, we send out the application which is then filled out and returned, and we don’t follow up the references provided. This is a common and costly mistake that credit professionals everywhere make. Always follow up with trade references provided in the credit application and don’t be afraid to ask the customer additional questions either. Below is a list of things you may want to ask during conversations with the trade references or with your potential borrower themselves:
Sending, receiving, and organizing important documents like a customer credit application is important to make you know that you have the completed document, when it was completed, and that it is being stored securely. That can be tough when you have so many applications to keep track of and an endless number of other credit management tasks to do; so we’ve made it easy. An automated accounts receivable management tool usually has a document management features that not only allows you to save and organize your customer credit applications, it allows you to:
You can also set up the software to notify you when it has been X days/months/years since a customer has filled out a credit application or since you have run a credit analysis on a customer to make sure your company is always protected against credit risk.
By Whittney | July 24, 2018 | General AR | Comments Off on THE ULTIMATE GUIDE TO BUSINESS CREDIT APPLICATIONS FOR CREDIT MANAGERS