WHEN AND WHY SHOULD A BUSINESS CREDIT APPLICATION BE UPDATED?
As the U.S. economy continues to slowly recover from the recession, a number of businesses continue to have difficulty and fail. It becomes problematic for the credit department when a customer’s account becomes past due and the creditor does not have a current credit application on file.
About eighty percent of bad debt, according to D&B, is from existing accounts that have been customers for over one year and your initial evaluations cannot be expected to predict a possible payment default that far down the road.
In today’s economy changes happen far more rapidly than before. Twenty percent of customers, according to D&B, can be expected to have significant changes each year. Some of the most common business changes include: lawsuits, judgments, or bankruptcy; changes in business address or telephone numbers; changes of officers or owners; and change of business name or business structure.
Trade references, banking, management, ownership, and the signatory on your customer’s business credit application should be reviewed every six months, or at least once a year. That review also needs to include any personal guarantees associated with the account. Other signals to have your customer update their business credit application is when conditions change in the economy or within your customer’s industry. Being diligent could help save your company from an unnecessary bad debt write-off.
Management should establish clear rules as to how often their customer’s files should be reviewed and updated. And yes, there will be exceptions to those rules. For instance, if a customer becomes seriously past due an updated credit application should be obtained and processed before deciding whether or not to continue to sell that customer on credit terms.
If costs or time restraints force you to limit the number of customer files reviewed consider prioritizing the reviews to new accounts, accounts that are seriously past due, and customers with your largest open account balances.
A simple way to request your customers to update their files is to send an updated credit application form to them with a short
cover memo. The following is an example of what your cover memo could state:
In accordance with good business practices, a periodic review of our files has indicated that we do not have a current credit application in your file. So that we may remain flexible in providing you with an adequate credit line as your needs change, we ask that you complete the enclosed application, sign where indicated and return it to us for our files.
Your business is appreciated.
If requesting a customer to update their business credit application causes a backlash, either internal or external, your company can use opportunities to obtain an updated business credit application. Examples would be: If no activity for a year the account should be considered inactive and require a new application; if the customer moves, or there is a change in management, or a change in business structure, change in terms, or if ever placed on COD, or if there is a request for a credit limit increase you then have an opportunity to request an updated business credit application.
When the updated credit application is returned it needs to be compared to their existing credit application in your files. Immediately address any red flags that come up during that comparison. For example, your existing credit application may indicate the customer is a sole proprietorship and the updated application may state that they are a corporation or LLC.
Review the signatures on the updated credit application and confirm it is signed by an authorized principal of the company. If a personal guaranty was included, was the personal guaranty returned and properly signed? Normal due diligence needs to be performed on the updated credit application just as you would for a new credit application. This is especially true when the customer’s payment habits reflect a slow payment history.
