Evaluate Your Commercial Credit Application

When you are extending credit to customers, it is important to thoroughly review their applications for all three phases of the client relation. If you have a good commercial credit application, it will protect your company if your ‘good’ debt goes ‘bad.’ That is why it is key for your company to have a systematic approach to the process.
Here’s how you can get it done:

Know Your Customer

It is vital to evaluate a potential borrower’s credit risk. It is the first part of the credit approval process and it will ensure that you are dealing with the right people who are authorized to make these decisions. Thoroughly collect the following information to accurately screen customers:

• Legal company name and all DBAs
• Contact information, including the company’s official mailing and physical address if different, phone number and email and contact for accounts payable and owners, if possible
• Business Entity Type, including LLC, S and C Corporation or Sole Proprietorship
• Tax EIN or SSN, depending on the type of business
• Establishment dates
• Personal identifiable information for all officers and owners, including SSN, ownership percentage, name and address
• Professional license number(s), ie., Contractor’s License etc.

To safeguard against any future issues and prevent an inability to enforce a future contract, get a list of authorized account users. This way you know who can make changes and purchases on the account. Also, acquire a continuing personal guarantee from owners and officers with separate, individual signatures. Obtaining purchase orders when it is indicated as required, or you may be left out in the cold. Lastly, you will always want to ensure this information is verified and current.

Qualify Your Customer

Not every customer is the right customer to borrow funds on credit. So, it is important to qualify your customers and evaluate their credit risk. Keep an eye out for these five key aspects before qualifying your customers:
Character: As the initial step in the commercial credit application review process, it’s critical to examine your customers’ character. This is their payment history track record and it helps you assess whether they are a good fit for borrowing funds or financing a product. History tends to repeat itself. Evaluate customers’ character by using references provided on the credit application and reviewing personal and business credit reports. This information can also assist you if the account starts to fall behind.

1. Capacity: After evaluating your customer’s character, it is important to determine their ability to pay you back. Evaluate your customers’ capacity by assessing their Debt-to-Income (DTI) and compare their income to their expenses. The lower the DTI, the less risk since there is greater income compared to less debt.
2. Capital: The capital includes the amount your customer can place as a down payment to obtain the credit, and it is a great way to qualify your customer. This may include a deposit to obtain funding or down payment for financing a product. You can also use capital as a way to determine if the customer has adequate cash reserves when they have low capacity. Ask for bank statements for at least the last two months.
3. Collateral: It is important to know what can be put up as collateral in the event customers are not able to pay. Typical collateral includes property liens, such as a lien on a home or business. You can also use the product as collateral, such as repossessing a vehicle your customer buys on credit or a professional license lien.
4. Conditions: Conditions include the financial environment your customers are operating in and the intended use of any funds or products your customers get on credit. Shifts in industry trends and changes in regulations can also impact repayment. If your customer is likely to experience a financial hardship or misuse the funds or product, then it may increase your risk.

Conduct as much analysis as necessary to reduce your risk. Also, ensure you have customers and their guarantors provide authorization for running credit and contacting the bank in reference to their application by having them sign release forms. Know your risk tolerance and create a balance that enables you to verify what is necessary without driving your customers away.

Manage Your Terms of Service

Your terms of service helps to define the rules and implications for not paying debt on time or at all. Thus, it is crucial that your terms of service are articulate well and clear. Define some clear rules and guarantee every department is aware of these terms, including your finance department and sales team. Put the right people in charge of managing your terms of services, and ensure they contact customers who fail to meet these terms right away in order to get them back on track.

Here are some key aspects to include in your terms of service:

Payment Terms
Indicate when clients are expected to make payments in your terms of service. Use terms, such as ‘Net 15’, ‘Net 30’ or ‘due upon receipt’ so that your clients understand exactly when payments are due. In many cases, it can be ideal to indicate that any payments made go towards interest first. In most cases and depending on your state, if your customers pay the principal of the debt in full and do not have an outstanding principal balance, you may not be able to enforce the collection of interest.
Interest Rates
Include the interest rate your clients can expect to pay should they make payments beyond their due dates or original payment terms. You should also be aware of what is the proper rate to accrue, so that you are not accruing over the legal rate allowed.

Attorney Fees and Costs
If you must take legal action to collect payments, you should expressly indicate your client’s responsibility in paying the attorney fees and costs associated with the legal process, if legal action is required in the collection process. Explain how your company will deal with these fees and costs, such as holding the customer responsible for any court-related fees.
Venue of Legal Action
If you have to pursue your client in court, it is important to identify the state and county where the legal action will occur.

Final Thoughts

Even with applying these steps, sometimes good debt situations turn bad. However, you do not have to handle the debt collection process on your own. You can count on the expertise of a reliable commercial collection agency, such as Tavelli Co., Inc. Reach out to us to see how we can help with your internal receivables, as well as when to use our collection services.

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Tavelli Co., Inc. has over 37 years of unparalleled experience in the debt collection and receivables management industry. Our mission is to achieve the right balance between getting clients paid and being empathetic to debtor circumstances, through implementing innovative practices, hiring experienced people, and improving business decisions through analytics. We provide peace of mind to all involved by collecting money with no complaints. Tavelli Co., Inc. takes the time to carefully listen to your customers and share their feedback with you through meaningful data and transparent communication, so you have access to the information you need to make quality decisions and improve your processes in the future. Contact us today and let the debt collection experts at Tavelli Co., Inc. help you set your business up for success.

IMPORTANT: Information provided by Tavelli Co., Inc., any employees of Tavelli Co., Inc., or its subsidiaries is not intended as legal advice and may not be used as legal advice. It is not intended to be a full and exhaustive explanation of the law in any area, nor should it be used to replace the advice of your own legal counsel.