A well written credit application can be a powerful tool for preventing debt collection problems. Not only can the application alert you to potentially problematic clients, it can also give you legal support if you do have a problem. Unfortunately, most credit applications are written to assess credit worthiness, not with an eye towards potential future collection problems. Here are 5 Mistakes you may be making with your credit application.
Not Having Companies Fill a Credit Application Out
Many business owners never even think about credit applications. They may assume that you only need a credit application if you’re loaning someone money. However, anytime you do work for a client before being paid, you are essentially loaning them money. Other owners may decide not to request applications from more well-established companies. However, even well-established companies sometimes have cash flow problems. A well-written credit application can not only warn you about potential payment problems, it can also give you contact information and give you legal backing if there is a problem.
Making the Credit Application too Long or too Short
An overly-long credit application is bad. Potential clients may become frustrated and may not want to fill it out. Or, they may overlook important information contained in the credit application. If you hide information in a credit application, a judge may rule it invalid. Keep in mind though, a too short credit application that fails to get you the information you need is also bad.
In addition to basic contact information, you want information that you might need to follow up on unpaid invoices. You should ask for contact information (direct phone number or extension and email address) for your contact, accounts payable, and the owner or senior management. If you can obtain contact information for more people or departments, you should do so. You never know when someone will leave a company so the more contact information, the better.
You will also want to ask for references and bank information to check credit worthiness.
Not Getting Permission for Personal Credit Checks
By law, you have to have written permission to run a personal credit report on a company owner. This may not be important when you start working with someone, but can become important later on, if the account is in arrears. You can often negotiate with an owner to pay from their personal accounts, if you know their financial situation. However, this permission is often more difficult to obtain once the account is late.
If possible, it’s great to have an owner sign a personal guaranty. This means that they become personally responsible for their businesses’ debts to you. However, many business owners won’t agree to this. They will however agree to a personal credit check.
Mismatched Credit Terms
Your credit application should not only collect information, it should also lay out your collection terms. Payment terms, late fees, and interest should all match between your credit application and any contracts you may have. Including payment terms in a credit application provides protection if there is a disagreement. Companies occasionally change payment terms and then forget to update the terms on all contracts and credit applications. If you include payment terms you will also want to include a “Binding Agreement” and an “Authorization to Bind.” These two terms state that the client is agreeing to the terms in the credit application and that they are legally allowed to speak for the company.
Skipping Certain Clauses
Although you don’t want to make your application too long, you do want to include certain clauses. An Acceleration clause is very important for any company that uses long term contracts with monthly or quarterly billing. With an acceleration clause, if a company breaks the contract, they owe you all the money at once. So, if a customer has a contract that runs from January 2021 to January 2022 and then in July they stop paying you, they will owe you all the money due through January 2022 as soon as they are in breach of the contract. Other clauses that you may wish to include to help you collect on unpaid invoices are:
- Interest (the right to collect interest on unpaid invoices)
- Collection Costs (the customer is responsible for collection costs)
- Attorney Fees (the customer is responsible for attorney fees).
Not every client will agree to all of the clauses or terms in a credit application. If a client asks to remove a clause, make sure you understand why they want the clause removed. If you are asked to fill out a credit application as a business owner, make sure you read and understand the application and any terms included.
For more information or resources on hiring a commercial collection agency, visit https://www.kaplancollectionagency.com.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.