Due diligence and the Business Credit Application
Businesses should understand that when credit terms are offered some companies will not pay timely and others will not pay at all. Developing a well thought out credit policy will helpminimize slow paying accounts and bad debts; however you will never eliminate them entirely.
The thoroughness of your credit investigation should depend on the amount of credit you extend and your risk tolerance. Most companies when receiving a business credit application will request information from the submitted business credit references and/or obtain a business trade report from one of the credit depositories. Unfortunately, that is all that some companies do.
Today’s business economy demands more. When processing a business credit application, due diligence requires: that the credit application be reviewed for completeness and that it is properly signed by a person authorized to bind the company to your terms and conditions; that the name on the application is their correct legal name and that they are in good standing with the Corporation Commission or Secretary of State’s Office. Is their professional license, if any, in the same name that appears on your credit application and is it in good standing?
As an example, if you are selling to a contractor and their license has been revoked, you may not be able to recover from their bonding company. Also, if their license is in a different name than that on your credit application you may also find that you are not be able to recover from their bond.
Whenever possible you should obtain a personal guaranty. Although we would all like to have the personal guaranty signed by the husband and wife, caution is needed in this area. The ECOA prohibits a creditor from requiring a spouse to sign a personal guaranty with few exceptions. Please see our article titled Business Credit and the Spousal Guaranty.
When obtaining a consumer credit report on the guarantor(s) do you know what indicators to look for when making an evaluation? Make sure that your guaranty form authorizes you to obtain a consumer credit report and addresses the ECOA requirement.
Now you need to request and review account information from their banking reference and review payment history, terms, trends, and comments from the business credit references submitted on their application. It is important to receive responses in writing (email or fax) so that you have a record of their response. When requesting information verbally you may not receive accurate and correct information. When a trade reference responds to you in writing they will usually research the information requested before responding to you and even if they have a personal relationship with the customer they will be reluctant to alter that data.
If your company obtains information from a credit depository you are receiving only that trade information that is submitted to them by their customers. You normally will not receive the name of the trade reference, the data will not be current as of today, and comments from the business trade references will not be available.
The credit application along with the data obtained during your credit investigation must then be evaluated by someone that has knowledge of the different types of business entities and the appropriate titles for the signatories along with a background in credit investigation and evaluation. Only then can a knowledgeable business credit decision be reached and credit terms established.
