Top 10 Reasons to Have Your Customers Fill Out a Credit Application
Credit Applications Are an Essential
Alex Armitage is the founder and CEO of Nectarine Credit, a credit application management software platform. Nectarine Credit offers the first 50 credit applications on their system for free.
Credit terms are used when a supplier sells goods or services to a customer with a future payment due date. This "buy now, pay later" payment practice is one of the most common types of financing between companies and accounts for trillions of U.S. dollars that firms are owed on any given day. Asking a client to fill out a credit application is the first step to offering credit terms. But the question is why do you need them to do this in the first place?
To answer that question, we’ve compiled a Top 10 list of reasons to have your customers fill out a credit application.There are more than 10 good reasons, but we think these are the best. You’ll quickly see that requiring credit applications is invaluable to the health of your company. Credit Applications are:
The First Step Towards Knowing Your Customer. According to the National Association of Credit Management’s Principles of Business Credit, a credit application helps sellers learn as much as possible about their customers before making a decision to extend credit. A credit application should be the first step in the onboarding process of a new customer.
A Window Into the Customer's Ability to Meet Its Credit Obligations. A credit application allows the seller to make informed decisions about a customer’s ability to meet credit obligations. At the very least, the seller will get a snapshot into the financial health of a prospective customer.
A Limit on the Seller’s Risk. A credit application helps prevent delinquent payments and financial loss. An accurate and up-to-date credit application is one of the best ways to minimize risk. The application also allows the company to better implement their credit policy since the buyer must sign off on the credit terms. (More on this below.)
A Way to Prevent Bad Debt Write-Offs. Simply put, clicking a button on a credit management platform and requesting a credit application could save you many thousands of dollars in bad debt write-offs.
A Baseline for Evaluating Changes in Creditworthiness. Companies change. Businesses change. The economy changes. Events in the lifecycle of any business can alter a company’s creditworthiness. Customer trade references and banking references, as well as management and ownership, should be checked and verified at least every six months.
A Tool for Monitoring Changes. As mentioned, creditworthiness changes. It pays to do periodic reviews, even on existing customers. So having customers fill out a credit application one time is not enough. The best way to monitor for changes is to use a digital platform like Nectarine Credit and get periodic credit scores. With just a click of a button, you can receive updates to your customers’ credit applications automatically. Or have them fill out a new application if the changes warrant a new application.
A Legally Binding Contract. The agreed upon terms, conditions, the guarantees and the electronic signature on a credit application make it a legally binding contract and will make a significant difference in the collections process. They can be relied on should litigation take place if a customer cannot pay.
A Means for Improving the Cash Flow for Your Customers. You might be wondering how improving your customers’ cash flow helps you if your customers are the ones who are getting the better cash flow. The truth is, happy customers are more likely to come back, order again and have a longer and healthier business relationship with you. Many businesses are not able to receive the bank funding they need and that prevents them from growing their business. You might be able to help. If they thrive, you will thrive.
A Lifetime Reference File. A good credit application can be referred back to again and again beyond the typical lifetime of a paper application -- sometimes years or even decades later. In addition to the obvious data points -- like company name, address, phone number -- a good credit application will have other invaluable data: bank balances, directors’ names and percentage ownership, vendor contact information.
The Best Tool to Use When aCustomer Requests a Higher Credit Limit. You may have a customer who pays within 30 days and only has a small credit limit. But what if that customer’s business starts to pick up and they request a higher credit limit? You can expect that their sales might increase in size and speed. That would be a good opportunity to check their credit and have them fill out an application.
Did we miss any reasons? Please add them to the comments section below.
Your Virtual Credit Manager is here to answer your questions and help you establish first class credit application and new customer evaluation processes
Stop Using Fax Machines
Hello, people! We are in the 21st Century. We really shouldn’t be using fax machines anymore. Any credit application you receive that asks for a fax number for a vendor or a bank, should be thrown out. Digital credit application management systems overcome the limitations caused by paper and faxed credit applications by providing a single repository of customer insights complete with automatic updates and workflow tools.
The Bottom Line
Simply put, the difference between having your customers fill out a credit application or not, could ultimately change the trajectory of your business. It’s not worth the risk.
For more information about onboarding new customers and credit evaluations, check out these YVCM posts: