Few business owners think of themselves as “lenders.” But, if you perform services or deliver goods before being paid, that’s exactly what you’re doing. You are lending your time or services to your clients. This makes having clients fill out the right credit application extremely important. Well-designed credit applications help weed out bad credit risks. However, even a good credit risk can default on bills. Not every company that fails to pay its bills experiences financial problems. Companies often stop paying bills because of poor organization, products or services. In these cases, a solid credit application is key.
Why Credit Applications Fail
A credit application not only weeds out bad risks but help you recover outstanding funds. Lawyers or accountants usually develop credit applications, but most lack the perspective of debt collectors. Debt collectors know credit applications are less about preventing unpaid debt and more about helping recover funds.
No one wants to develop a credit application from scratch, so many copy previous applications. Problems are repeated and standardized without the needs of the company considered. Using older, non-individualized credit applications are common in small businesses that go without an internal credit department. Unfortunately, small businesses can't afford these mistakes.
What to Include
A reliable credit application protects a company if a formerly good risk stops paying its bills.
Here are 7 elements frequently missing from credit applications:
- Extensive contact information: This is necessary if the customer suddenly wants to avoid you or your original contact passes away or leaves the company. Not every company has a transition plan. When a contact leaves, their obligations are often lost in the shuffle.
- Acceleration Clause: This allows you to require a borrower to repay all outstanding payments if specific requirements go unmet. An acceleration clause is especially important if your business relies on contracted monthly or quarterly payments.
- Attorney fee and collection costs provisions: This means that if you have to hire a lawyer or collection agency, the client is liable for the costs. In reality, these fees are often not collected. However, having the fees in your credit application and contract provides a valuable bargaining chip in case of a dispute or past due invoice. Knowing that if they force the matter into the courtroom, the judge will add these significant extra costs. The provision also acts as a motivation to pay and saves creditors the time and expense of litigation.
- Correctly worded litigation venue, jurisdiction and law provision: Collection and interest laws vary from state to state. It’s crucial to know where your disputes will be settled.
- Permission clause to evaluate a business owner’s personal credit: This is especially vital when doing business with a smaller company or one-person shop. Although the company may look good on paper, if you discover that the owner is having financial problems, you may wish to change the terms of the agreement.
- Personal guaranty language: Meaning the business owner accepts responsibility for business debts. This is especially helpful if a company closes or declares bankruptcy.
- Well-designed signature block: The text surrounding a signature gives context to the signature. Signature blocks often contain the name of the party, the names and titles of people signing on behalf of that party. Plus, contact information for that party.
Make it Easy to Collect
As an experienced debt collector, we’ve seen firsthand how not including these items makes it more difficult to collect overdue invoices. As a result, companies are forced to accept discounts or longer payment plans or are simply unable to collect.
Most businesses only research clients as a way to land the client. However equally, if not more important, is getting an invoice paid. Extending your research past the initial landing stage will pay off in the long run.
Written by Dean Kaplan
Read more posts by Dean Kaplan