Steve Harms

Monday, September 19, 2011

Using documents in the extension of credit

You can help keep the odds in your favor by insisting on good documentation throughout the credit and collection process. Good documentation begins with a credit application, which is required before your first sale on credit to any customer, new or old.

Beyond requiring credit applications, you should frequently review credit information for all your customers. Depending on your industry and your history with the customer, reviews might occur every six months or every year, but even with established customers you won’t want to go beyond a two year review schedule. In between reviews, update your customer’s credit information whenever you come across new relevant information. Have your customers complete a new credit application or make appropriate additions and deletions to the old one.

You can avoid a lot of difficulties with defaults if you monitor your clients for changes in their business and financial health. For example, if you find out that a customer’s business has new ownership, or that the owners have formed a new but similar company (John’s Bike Shop is now John and Mary’s Bike Shop), it may be time to thoroughly recheck that customer. Sometimes your clients really don’t want you to find out about changes, and that’s a reason in and of itself to recheck them.

If a customer won’t take the time to fill out a credit application, and you choose (or need) to extend credit to the customer anyway, you can protect yourself. Make sure you interview that customer to obtain the information you need to determine creditworthiness and to use as a resource if the customer’s paying habits deteriorate. If you interview the customer by phone, keep a recording of the call (but be sure you can legally record the call under the laws of your state), or write the answers down on your standard credit application and add the completed document to the client’s credit file. Basic information includes:

* Full, legal name, physical address, and phone numbers.

* E-mail addresses, Web sites, and other online references.

* Contact persons.

* The customer’s legal entity (corporation, limited liability company, partnership, and so on) in case of eventual litigation.

* Agreements concerning payment of interest and costs of collection, together with other written agreements you and the customer enter.

* Bank account information, which is extremely useful if and when you’re looking for assets to attach post judgment.

Even with a formal credit application in hand, you may require other key documents before extending credit, including

* Financial statements, which establish a picture of the applicant’s assets and liabilities as of a certain date.

* Operating statements, which show the applicant’s sales and profits over a certain span of time.

* Personal guaranties, giving your company additional protection should the customer’s business falter.

* Liens that, in the event of default, allow you to take action against the customer’
For a complete discussion on this topic, see this book

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