If constructed and executed properly, the credit application is a tool that can aid in the decision to extend credit to potential customers, serve as a point of reference for gathering information in the event of non-payment, and function as an enforceable document if litigation becomes necessary. Yet, ABC-Amega’s experience seems to show a decrease in its use. Fewer of our clients are now able to provide credit applications to support our collection effort. Although it appears to be growing less popular, we believe the need for a thorough credit application has never been greater than under current market conditions.

Essential Elements of a Credit Application

We have included a Sample Credit Application in PDF format that can be used, with country-specific modifications, in most areas of the world. If your customer is located in Mexico or another Latin American country, you might be interested in reading this article by one of our Mexican creditor’s rights attorneys, “Reducing Risks on Credit Sales into Mexico – Part 1.”

Elements we recommend be included in a thorough credit application:

All logistical and legal data on the customer, including their exact legal corporate name, legal status (i.e. corporation, partnership, LLC, etc.), relevant state or national identification numbers, the names of all principals or corporate officers, and of course place of incorporation, address, and phone and fax numbers. This detailed profile will help you locate an evasive customer in the event of non-payment. The exact legal status of the business is vital in terms of future collections. For instance, if the business is a corporate entity, then, unless you have a signed personal guarantee, it will not be possible to attach the owner’s personal assets.
Bank account information – in the event you have a judgment and need to attach company assets.
Trade references, preferably in your own industry. And make sure you actually contact them.
Personal Guarantee of the primary shareholder. Recommended for any new customer in business less than 5 years, or new foreign customers on which you are unable to obtain extensive credit information and references. If the buyer company does not have the ability to pay your account, then it is possible to collect from the shareholder’s personal assets.
Terms and conditions. If the account ends up in court, you will need to prove that the buyer was fully aware of the terms and conditions of the sale. Absent a formal contract of sale, a signed credit application including this information is your proof.
Arbitration clause. Including an arbitration clause in your credit application gives you a tactical advantage over the debtor. It permits you to specify jurisdictional location and method of recovery when your customer operates in a market where a credit application is not a recognizable or enforceable document. Arbitration is also generally much faster and less expensive than resorting to a lawsuit, especially in a foreign country.

Don’t Let a New Customer Talk You Out of the Credit Application

In the US and many western countries the use of credit applications is an established commercial practice. However, there are some foreign markets in which use of credit applications is either completely unknown or very limited. In these instances there is no reason to forego your requirement. If your customer balks at the prospect, you can always claim it is a requirement of your bank or your credit insurer.

Are Credit Applications Disappearing from the Business Landscape?

In the past, it was common practice for all creditors to require completed credit applications from all but their most obviously solvent customers. In today’s sluggish economy, the desire to complete a sale may overshadow the need to practice sound credit management. While there are obviously sales too minimal to warrant its use, we continue to feel that a signed credit application with a signed personal guarantee should be obtained before any significant credit transaction.

As our experience seems to indicate that creditors are no longer using them, we would like to hear from our readers -- Do you use credit applications? If not, why not?

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Disclaimer: This information is provided by ABC-Amega Inc. and is not intended to be legal advice and is not a substitute for competent legal advice on the referenced subject.

ABC-Amega is a commercial receivable management firm providing 1st and 3rd-party receivable management services in the U.S. and more than 200 other countries worldwide.