When Good Debt Goes Bad - A Commercial Credit Application Review
When you're extending credit to customers, it's important to thoroughly review their applications. If you have a good commercial credit application, it will protect your company if your "good" debt goes "bad." That's why it's key for your company to have a systematic approach to the process.
Here's how you can get it done:
Know Your Customer
It's vital to evaluate a potential borrower's credit risk. It's the first part of the credit approval process, and it'll ensure you're dealing with the right people who are authorized to make these decisions.
Ensure you 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
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 ensure you don't fall into any future issues or are unable to enforce a future contract, get a list of authorized account users, so you know who can make changes and purchases on the account. Also, get a continuing personal guarantee from owners and officers with separate, individual signatures. Provide purchase orders when it's indicated as required or you may be left out in the cold. Also, 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's important to qualify your customers and evaluate their credit risk. Use these five key aspects to qualify your customers:
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. Evaluate customers' character by using references provided on the credit application and reviewing personal and business reports. This information can also assist you if the account starts to fall behind.
After evaluating your customer's character, it's 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 higher the DTI, the less risk.
The capital includes the amount your customer can place as a down payment to obtain the credit, and it's 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.
It's important to know what can be put up as collateral in the event customers aren't 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.
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 you 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's 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. So, it's important your terms of service are are clear. Define some clear rules and ensure 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 to get them back on track. Here are some key aspects to include in your terms of service:
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. It's also 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 won't be able to enforce the collection of interest.
Include the interest rate your clients can expect to pay should they make payments beyond their due dates or original payment terms.
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 costs and fees associated with the collection. Explain how your company will handle 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's important to identify the state and county where the legal action will occur.
Even with applying these steps, sometimes good debt situations turn bad. But you don't 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. Feel free to reach out to us to see if we can help.
ABOUT TAVELLI CO.
Tavelli Co. is a Sonoma County based receivables management firm that is committed to doing business the right way! At Tavelli Co. we focus on three key pillars to optimize our client's cash flow and customer relationships. PEOPLE, TECHNOLOGY, & FEEDBACK drive our results. First, we hire the best customer service representatives. Having the right PEOPLE talking to your patients and customers is crucial to the success of your revenue cycle. We put our people first so they put your customers first. Second, we never use TECHNOLOGY to cut corners. Forget auto-dialers, long hold times, or any technology that puts a barrier in front of a customer that wants to talk to a representative. We don't like when we are on the other end of this technology, so we don't use it. Finally, we believe that your past due receivables are your most valuable asset in gaining insight into what needs improvement in your revenue cycle. We take the time to listen to your customers and report back to you through meaningful analytics, so you have the FEEDBACK you need to make quality decisions.