Credit Application Process

It is sometimes possible to increase sales by granting credit to selected clients who may choose to do business with you because of the convenience offered by a credit account. If you choose to provide this option be sure to develop a sound credit application process which includes a thorough check of client credit ratings before granting approval.

Allowing some clients to purchase on credit is like offering them an interest free loan, and you are not obliged to provide credit to risky clients. Allowing clients to defer payments increases the risk of bad debts occurring and draining your cash flow, so it's vital that you identify good customers and screen businesses with a poor credit history to minimise bad debts and avoid cash flow problems.

Develop a credit application

Develop a credit application form and have the draft checked by your lawyer. The credit application and approval process could include, but is not limited to the following steps:

  • the completion of a credit application form which requests full business and personal contact details, trading name, credit guarantors, referees, Australian Business Number (ABN) and the number of years in business;
  • asking for details of suppliers who can be contacted as referees and then checking the client's payment habits with the referees;
  • requesting bank references;
  • asking the client to sign a directors' guarantee which makes the directors of a company personally liable for any debts incurred with your business;
  • checking the client's business registration on the Australian Business Register;
  • obtaining a credit report to determine whether the client is credit worthy. A range of credit reports can be obtained from commercial information brokers listed with the Australian Securities and Investments Commission (ASIC) . Discuss the reports available and the costs involved with individual broker firms; and
  • periodically evaluating the credit rating of your existing credit clients.

Alternatives to providing credit

You may find it necessary to reject credit applications in some cases. Rather than risk losing the client entirely, you might suggest alternative payment methods while your client establishes a trading history with you. Review the client's situation after a specified volume of trade, number of orders, or period of time.

The alternative methods may include:

  • requesting cash on delivery ( COD ) for new clients until a trading history is established;
  • collecting a deposit before making a supply to cover costs of materials and overheads, and as an indication of their ability and intention to pay;
  • collecting progress payments that are linked to achieving major milestones. Progress payments are common in the construction and building industry; and
  • lay-by

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