Due Diligence & Credit Applications
I’ve said it many times but it bears repeating, many if not most of your collection problems are preventable. In the words of the eminently quotable Benjamin Franklin “An Ounce of prevention is worth a pound of cure”.
A Quick Review
Part I – Get complete contact information from new customers and check contact information with returning customers. For a more complete discussion see our September Newsletter or read it here You can also download a Contact Information Check List here.
Part II – Invoicing errors are responsible for more than 50% of late payments. For a more complete discussion you can read the post here and you can download a PDF list of the 12 invoicing errors I see most often.
Part III – More on invoicing, terms and conditions late fees and Purchase Orders . You can read it here.
Moving On …
… to Due Diligence and Credit Applications. Another way, in fact probably a better way to collect contact information is with a credit application that is appropriate to your companies needs. Not every order is big enough to warrant a full fledged credit check but even if the order is too small it’s a good idea to have your customer fill one out. The purpose of the credit application is 3-fold;
- Collect information to evaluate credit worthiness
- Establish terms
- Secure protection in the event of default
You’ll want to collect not only the information you need now to process the order being placed but also the information you may need in the future should your customer default.
Trade and Bank References
A common error I see when evaluating credit is the failure to obtain banking information. Remember, most companies can easily provide 3 vendors who will say your prospective customer pays timely, whether they do or don’t. A bank reference will give you a truer picture of your customers financial condition, including average balances, loans etc.
Terms and Conditions
–Without written terms and conditions any agreement you make with your customer is worth just about as much as the paper it’s written on. Without signed documentation your customer could claim anything. “The sales person said I could return it within 6 months,” or “I was told I could pay when I get paid” are a couple we’ve heard many times. Our friends over at The Kaplan Group recommend including the following in any agreement to grant credit;
- Binding agreement
- Authorized to bind company (so you can avoid “he wasn’t authorized to order”
- Information is true
- Permission to evaluate credit
- Vendor’s discretion to grant credit
- Applicant owes Vendor
- Vendor’s forms have precedence
You can download their 78 page Credit Application Handbook on our Resources Page here, or on their website here. It has several editable credit applications and guidance on how to use them. And it includes a checklist of 40 items you can use to evaluate your credit application.
If you want to clean up your receivables i.e. start collecting your money and organize your AR department NOW check out my Collection Prevention Accounts Receivable Management Manual here. Normally I’d let you know how many pages it is but I’m adding 2 completely new sections and updating some very old information as we speak. Purchase now for $79 with lifetime updates FREE or later when I’ve finished these most recent updates (I’ll be finished in about 10 days) for $129. You’ll still get free updates for life:)