Tips & Strategies - May 2010

Credit Applications - What's Important and Why?

1. Don't Make Any Exceptions - all customers who order goods or services on credit should complete a credit application so you have good quality information on them, a signed acceptance of your terms and conditions and the opportunity to make an informed decision about whether you should extend credit. 
2. Gather as Much Quality Information as You Can  before you approve a credit account. When customers are keen to purchase this is your best opportunity to get to know them. When payment is overdue they won't be so cooperative and if you have inadequate or incorrect information it will be  difficult to collect any debt they have incurred.
3. Correct Legal Entity - Find out if the applicant is a private individual (consumer),  sole trader, partnership, private company or trust as not all applicants should be managed in the same way. For example if the applicant is trading as a sole trader or partnership the owner/owners are automatically personally liable for any business debt, but if the applicant is a private company the directors are not personally responsible for the company's debt so a signed personal guarantee is recommended. If the applicant is a trust you need to be very careful because you can't credit check or sue such an entity. Look out for a future newsletter covering how to manage customers trading as a trust. 
4. Legal Name - You must identify the full legal name of the person or legal entity who will be responsible for paying the account. This information is particularly important if you need to take legal action to recover a debt.  
5. ABN / ACN - It is important to ask for the the ABN / ACN so you can easily verify the trading name and/or company name on the application form. Use the Australian Business Register (ABR website) for the legal entity associated with the ABN and  ASIC's website  for companies and their date of registration. Directors of very young companies with no credit history should be asked to sign personal guarantees so you have some protection if the company goes into liquidation. If you don't have a Guarantee & Indemnity Form contact Ledger Guard for assistance.
6. Personal Information  - You need the full name, date of birth, private address and private phone number of any consumers who apply for credit and the same information on directors and business owners if it is a business applying for credit. You will need this information to confirm they are who they say they are and if you wish to check out their personal credit file. The private phone number of the business owner or director is also useful contact information if you are trying to collect a debt.