Credit application: purpose and use

BY ABE WALKINGBEAR SANCHEZ
Credit management specialist

You invest time, money and energy to get to the point where a new customer wants to buy. At this stage, a legitimate question is, “How would you like to pay? Cash, check, credit card or on account?” If the customer selects credit terms, you need to be ready to get some information.

By the way, don’t assume that all new customers require or desire credit terms.

 

Purpose of a credit application

The two reasons for a credit application are:

• To obtain information on:
  • Who the customer is; i.e. name, address, time in business, type of business, business status, phone/fax/e-mail numbers and address.
  • How the customer does business; i.e. po system, authorized purchasers, partial ship policy, a/p cycle, ship to/bill to, proof of delivery, freight and so on. It is very important that this information be asked for going in. Fail to do so and you risk slow payment and higher costs of doing business for both you and the customer.
  • Who the customer has done business with in the past on credit terms; i.e. trade references.
• To get an agreement on the terms and conditions of the sale:
  • Payment due dates and late charges
  • Discounts
  • Court costs and attorney’s fees (in the event of default)
  • Personal guarantees (may not be binding if it is included in with other terms and conditions)
  • Return authorizations/changes
  • Special orders
  • Partial ships
  • Back orders/substitutions
  • Freight charges.

This is where the problems begin. Who is supposed to get the credit application filled out and signed? The sales guys? The credit guys? And then there are large customers who don’t do credit applications; if you’re lucky you get a po number and a vendors list.

Some customers delay filling out credit applications, and this leads to delayed sales and to customers taking their business elsewhere.

One size may not fit all
There are three key factors to consider in approving a credit sale.

• The customer’s profile (who and how).
• The customer’s past performance (Have they ever paid anyone in the past? If they haven’t, what makes you think you’re going to be the first?).
• The value of the product/service to you (the seller) at the time of the sale.
  

A major problem with credit applications is that they are preprinted with standard terms and conditions of sale. Preprinted credit applications offer everyone the same terms and conditions even before you’ve had an opportunity to weigh/consider the customer’s profile, to check out the customer’s past performance, and to take into consideration the “product value” to you.

With preprinted credit applications, profitable sales may be lost because it’s easier to reject the customer -- and the sale -- than go back in and resell new terms and conditions such as down payments, shorter terms, warehousing arrangements and so on.

“Break-even is good. Sales beyond break-even are gravy.”

An alternative
Instead of a preprinted credit application with standard terms and conditions of sale, consider use of a “New Customer Information Form” and companion “Account Confirmation.”

When a new customer wants to buy on credit terms (open account), the person speaking with the customer should fill out -- hopefully on-line -- a New Customer Information Form. Sometimes it may require a follow-up call to someone else at the customer’s company to get the needed information, i.e. customer profile (who and how) and trade references (what, who and how). This is the same profile information you’d ask for on a credit application and information on how the customer does business.

At this point you have time to review the customer’s profile, check them out and weigh the “product value”... prior to coming up with terms and conditions of sale.

Account confirmation
Once the decision has been made as to how to sell the customer, i.e. standard terms and conditions, or special terms, put your understanding in a letter/agreement and e-mail or fax it to the customer for review and acceptance.

What goes in the letter/agreement? Something like the following would be appropriate:

Thank you for the opportunity to do business with you. Following is our understanding of the terms and conditions of our relationship. Please review at once and if you’re in agreement, sign and date at the bottom and fax us a copy at (your fax number). We will be sending out two copies of this confirmation by regular mail, one copy for you to keep and one to be signed and returned to us.

Please call me at (your phone number) if you have any questions.

Account Confirmation/Agreement

In consideration of credit being extended to (Customer Name), I, the below signed hereby agree to the following terms and conditions of sale.

Terms and conditions (add, modify or delete items as necessary for your business)

Term of sale: Payment is due ____ days from date of invoice.

Statements: Statements are sent at the end of each month and detail all of that month’s account activity plus late charges (if they apply).

Late charges: A 1 1/2% per month (18% apr) late charge will be added to all invoices unpaid after _____ days.

Minimum credit purchase: Due to the cost of processing charge orders, we must add a $_____ service charge to all purchases under $______.

Returns: Returns must be approved in advance and may be subject to a 10% restocking charge.

Shipping charges: Unless otherwise directed, all orders are shipped via ups ground.

Authorized Signature
Date

Last thoughts on credit applications
Don’t get caught up in the details involved and lose sight of the big picture. You’re extending credit in order to get profitable sales that would otherwise be lost to you. A credit application or New Customer Information Form are steps in the process and not an end to themselves.

Don’t get caught up in worrying about offering different terms to different customers, i.e. “price discrimination.” You can offer different terms and charge different prices, unless you’re doing so to create a monopoly.

And lastly, give some thought to the different categories that your customers fall into. Are they large corporations or government agencies, and therefore unlikely to fill out a credit application? Are they ma and pa companies that will fill out a credit application? Then put together your Credit Sales Process and the tools and forms needed to support it.

Abe WalkingBear Sanchez is a visionary leader of the profit-centered credit and collection movement. Recognized as the leading practitioner in the field, he is the developer of the copyrighted Profit System of Credit and Collection Management, a unique and well-proven set of methodologies recognized as the most significant [r]evolution in credit management in the last 50 years. Founder and president of a/r Management Group, Sanchez is a frequently published author and is featured in several training videos. He can be reached at a/r Management Group Inc., P.O. Box 457, Canon City, CO 81215 or by e-mail at Abe@armg-usa.com