Tips & Strategies - February 2010

How to Create a Credit Policy

1. Who Will You Accept As An  Account Customer? You need to take into account the level of risk you are comfortable with and know when you should walk away because the risk is too high. Think carefully about young companies, trusts and any business or individual with a poor credit history. Can you minimise your risk with a personal guarantee, a registered charge or a bank guarantee?
2. What Customer Information Do You Need?  Get to know as much as you can about all your customers, but you need to be practical. COD customers should fill out and sign a simple one page Work Authorisation Form agreeing to your Terms and Conditions of Trade before you supply your goods or services. Your form can be faxed if necessary or handed over before a job starts. Without exception, all customers who ask for trade credit must complete an account application requiring quality information on the business and business owner or individual who will be purchasing your goods and services on a promise of payment at some later date. (Look out for our future article "How to Design an Effective Credit Account Application" or contact Ledger Guard now for specific advice.
3. Who Should Sign the Credit Application?  The application form should be signed by an authorised signatory (director or business owner) who is agreeing to your Terms and Conditions of Trade and giving you permission to look at his/her consumer and commercial credit file. A manager may be an authorised signatory, but in a court of law you will want the paperwork signed by the registered owner of the business, not an employee.  
4. What Steps Must Be Taken to Check the Details on a Credit Application and Who Will be Responsible? First of all check that the ABN listed on the application matches the company/business name. Look up the ABN on www.abr.business.gov.au and contact the applicant if there isn't a match. Make sure you have your customer's correct legal entity - are they operating as a private company (Pty Ltd), a Sole Trader, Partnership or Trust. Invoices and legal papers must be invoiced correctly. The owners of a sole trader or partnership business are personally liable for any business debt but how should you handle a company or trust applicant?
5. When Should You Request A Personal Guarantee?  Do you need a personal guarantee from directors of all private companies or are you only concerned about young companies established in the last 5 years? What about extending credit to a business trading as a trust? Can you make one of the trustees a personal guarantor or do you reject the application?