Does Your Business Need a Credit Application?

If you deliver goods or perform services before being getting paid, you’re lending your services or time to your clients. Which means, your clients are essentially borrowing money from you. When looked at that way, it seems obvious that you should carefully research new clients and require them to fill out a credit application. 

A recent study by US Bank indicated that 82% of businesses that fail do so because of poor cash flow management.

On average, small businesses are owed $84,000 in unpaid invoices. The right credit application could help reduce that amount for you. It will not only weed out bad credit risks but also make it easier for you to collect on unpaid invoices.

Most credit applications are developed by lawyers or accountants who do not always consider how to make sure a client pays their bills.

Because nobody wants to reinvent the wheel, new applications are then copied and pasted from older applications. Problems within the application are continued. It makes sense that smaller companies without a credit department would fail to recognize problems with and continue to use a general credit application.

But, a small business could benefit even more than a large business from an individualized credit application. It’s clear that $84,000 is a lot of money for any business, but it can make the difference between surviving or failing for a small business.


A Good Application

A good credit application helps protect a company in the event that a client stops paying their bills. You don’t have to develop your own, you can find credit application examples online.

Here are some important elements to include in your credit application:

1. Contact information for Multiple People

If your original contact leaves the organisation or if your contact suddenly starts avoiding you, or, you’ll want to have options for getting in touch with others at the business.


2. Permission to evaluate the business owner

For many smaller companies, the financial state of the owner and of the business are closely linked.

Knowing the financial situation of the owner may help you decide on how big of advance payment you need to begin work or other payment terms. 


3. Personal guaranty language

It’s also true that a business owner could be in good shape financially, while the business is failing. A personal guarantee means that the owner of the business takes personal responsibility for any debts that the company incurs.

This can be very important if an organization later has cash flow problems.  Your invoice will have a higher priority to the guarantor than invoices that aren’t guaranteed.


4. Collection costs and attorney fee

If you have to hire an attorney or collection agency you want the client to be liable for all the costs. Having the fees in your contracts and credit application presents a valuable bargaining chip in case there’s a disagreement.

Most clients would prefer to avoid going to court over their unpaid debt if they know that they could be liable for the other side’s fees.

Some of these items may seem more relevant to a contract than a credit application. It is important to have both strong contracts and a good credit application.

Including these elements in both credit applications and contracts can provide you with more protection. A lot of businesses spend time researching potential clients as a way to land them and then stop.

But getting a new client is only helpful if that client pays their bills.

Having a strong credit application and application process will help protect your business and prevent you from becoming a statistic. 


Dean Kaplan
Dean Kaplan
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.

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