The Why and What of Credit Applications

By Dean Kaplan, CEO and President, The Kaplan Group

Many small business owners never think about credit applications. After all, small businesses are trying to get money. They aren’t loaning it. But, if you send a product or provide services before getting paid, you lend money to that person or business. According to the Small Business Association, 20% of new businesses fail in their first year and only 35% make it to ten years. One of the more obvious reasons that businesses fail is poor cash flow. At the root of many cash flow problems are issues with unpaid invoices. A credit application can help you avoid this common business problem.

Why Create a Credit Application

There are two types of unpaid invoices, those that a company is trying to pay and those that a company never had any intention of paying. A credit application can help with both of these issues. In the case of a company that has no plans to pay their bills, that’s fraud. One of the easiest ways to detect business fraud is to confirm certain information (company name, address, contact information, parent companies, etc.) provided on a credit application. These checks can be done easily using free online resources.

For companies trying to pay their bills, having trouble doing so, having certain kinds of clauses and guarantees in your credit application can make collecting easier. Unfortunately, many credit applications are created by lawyers who are not familiar with collection practices. This is why you must review the credit application you are using to ensure certain terms and clauses.

What to Include on a Credit Application

An overly-long credit application is bad. Potential clients may become frustrated and may not want to fill it out or overlook important information in the credit application. But a too short credit application that fails to get you the information you need is also bad.

In addition to basic contact information, you want information you might need to follow up on unpaid invoices. You should ask for contact information (direct phone number or extension and email address) for your contact, accounts payable, and the owner or senior management. If you can obtain contact information for more people or departments, you should do so. You never know when someone will leave a company so the more contact information, the better.

You will also want to ask for references and bank information so you can check creditworthiness.

Payment Terms

Including payment terms in a credit application provides protection if there is a disagreement. Any terms in your credit application must be correct and match what is on your contracts or invoices. Companies occasionally change payment terms and then forget to update the terms on all contracts and credit applications. If you include payment terms, you will also want to have a “Binding Agreement” and an “Authorization to Bind.” These two terms state that the client agrees to the terms in the credit application and is legally allowed to speak for the company.

Acceleration Clause

Acceleration clauses are essential for SaaS companies or any company that uses auto-renewals for billing. If a company breaks the contract with an acceleration clause, they owe you all the money at once. So, if a customer has a contract that runs from May 2020 to May 2021 and then in January they stop paying you, they will owe you all the money due through May 2021 as soon as they are in breach of the contract.

Personal Guaranty

Most companies are set up to protect the owner from being personally liable for the company’s debt. A personal guaranty clause in your credit application makes the owner personally responsible for the debt. Including a personal guaranty clause may make you feel more secure in doing business with an underfunded company if you trust the owner. Having this guaranty in place may also mean that if a company is having trouble paying their bills, they’ll pay you first.

Other Default Provisions

Other provisions that you may wish to include to help you collect on unpaid invoices are:

  • Interest (this gives you the right to collect interest on unpaid invoices)
  • Collection Costs (this makes the customer responsible for collection costs)
  • Attorney Fees (this makes the customer responsible for attorney fees).

Not all of your clients will agree to all of the clauses or terms in your credit application. If a client asks to remove a clause, make sure to discuss why they want the clause removed.  It is fine to evaluate the situation and remove clauses on a case by case basis. It’s also important to remember that as a business owner, you are also filling out credit applications. Make sure that any time you are asked to do so you read the application and any terms included.

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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