I was prompted to attempt to answer the question to myself after noticing a similar question in a recent credit manager association group. I suppose we should first consider who does qualify for credit. Even in doing this, there are some basics to review.
The Credit Application
Credit extension has been going on for quite some time, and many if not most companies today utilize what is referred to as a Credit Application. I’ve written quite a few applications over the years for several companies. In the supplier to business food industry the task is rather routine and straightforward. In the construction industry, the requirements are a little more extreme.
Most credit applications consist of a profile portion, a contract portion, and a commitment area (signatures). All of these are fairly equal in importance. There are supporting documents as well that are usually needed or at least wanted by the company’s credit manager to file into the applicant’s folder largely to show that an effort was done to complete the information gathering processes as well as to have on file “just in case”.
The profile portion is information about the applicant such as his or her business name, address, and contact numbers and methods. Usually included in this information-gathering section are credit references that can be called to see how the applicant pays the bills. Banking information is also usually requested, but in today’s world it is difficult to receive much feedback from your local banker – they don’t like to share. Other information may include who to send the bills to (accounts payable contact information) and who the owners are. If the industry requires licensure, it is good to know and document this information. It is also good to know the owners’ social security numbers and residence addresses.
The contract portion is what many refer to the “boilerplate”. This is the section where the company attempts to consolidate everything it expects of the customer, everything the company can, will, or may do if the customer doesn’t do everything the company expects, and the way conflicts and general business will be conducted until the end of time – the typing of which is inconveniently sized down so as to be packaged onto an 8 ½” x 11” sheet of paper. For the company, it is my recommendation that each bullet point be applicable to the company’s needs. If it doesn’t make sense to include it, then get rid of it and keep it clean.
The commitment portion is where the parties agree by way of signature. In reality, the applicant is usually the only one to sign that he or she agrees to the contract portion.
The supporting documents vary from industry to industry and company to company. It is always good to make a copy of the driver’s license of the person signing the credit application. In Michigan, we can contact the State’s website fairly easily to verify if a company has organized, and how – such as a corporation or LLC. If the applicant is to be sold exempt of state sales tax, a sales tax exemption form is needed (as well as a basic understanding of Michigan Sales Tax). Other information may be pertinent to the situation and may vary by your local customs.
The Personal Guaranty
There is one other document that usually accompanies the Credit Application and that is the Personal Guaranty. The use of this document tends to get a little trickier and usually someone who has been around a while (or your trusted contract attorney) will be able to share the importance, effectiveness, and pitfalls of introducing Personal Guaranties in your situation. Again, I’ve written several, and I can tell you that whether yours is a single paragraph or two, or three legal pages, everything is litigious.
The Credit Application Review is largely handled by the Credit Manager or the company’s owner. A checklist can be devised for ticking off the duties of the review which generally cover answering a few company general questions:
1) Have I verified what has been placed onto the Credit Application’s profile?
2) Have I obtained good responses from most if not all of the credit references provided?
3) Have I looked beyond what appears in black and white and answered my/your own questions?
The Credit Manager is usually responsible for looking out for the company’s interests with regard to making good decisions involving the exchange of goods or services on credit, and getting paid in a timely or acceptable manner. Unless you are obtaining green cash up front, there is always risk involved.
A good Credit Manager is one who looks at all the criteria and makes sure that all the information, references, signatures, and supporting documents line up to the parameters required by the company. After everything is completed, and all systems are a “go”, the only real decision to make when opening an account is how much to allow for a credit limit.
A great Credit Manager is one who takes a look at all the information and is perfectly comfortable saying “No” even though everything checks out. I’m not suggesting that there is anything negative or unjust. I’m simply stating that if a company truly is serious about its receivables and wants to avoid potential for problems, it needs a person with the intuitive ability to filter out and dig deeper into how an account is really going to perform. A great Credit Manager has a “gut” feel about his conversation with new credit applicants (which is why great Credit Managers want to speak with applicants and meet them before making a decision). As a for instance, a great Credit Manager will question why an applicant is applying for credit for materials when the construction season is just about over and two competitors are closer to him than you are. You get the idea. There are several aspects involved.