Is Your Credit Application Sufficient?

Application for CreditToday we’re posting a guest blog written by Dean Kaplan, President of The Kaplan Group, a commercial collection agency and consulting firm, and a National List client.

One of the most common mistakes business owners make is failing to properly assess new clients as credit risks. Businesses that provide services, as opposed to goods, are especially prone to commit to work before determining if a client will be able to pay. Unfortunately, many business owners simply fail to recognize that whether you’re sending equipment or goods or providing services, almost all business relationships involve granting credit.

Even those businesses that do recognize that they are granting credit to clients and insist on credit applications often fail to properly develop their credit applications. This is because many credit applications are designed to help weed out bad credit risks. However, even a good credit risk can default on bills.

Because attorneys, accountants or in-house personnel lacking debt collection experience develop many credit applications, the perspective of the debt collection process is rarely considered. What’s more, because no one wants to reinvent the wheel, credit applications are frequently developed simply by looking at previous applications. This method allows problems to become repeated and standardized, and it often fails to consider the specific needs of the granting company. Using older, non-individualized credit applications as a model is especially common in small businesses that may not have their own credit department. Unfortunately, small businesses are the ones who can least afford these mistakes.

A well-designed credit application,* will not only assist with credit but also help protect a company in the event that a formerly good risk turns bad. Some common items missing in conventional credit applications include:

  • Extensive contact information (necessary in the event the customer suddenly wants to avoid you);
  • Acceleration clause of all amounts due under contracts;
  • Provision for customer to pay collection costs in the event of default;
  • Attorney fee provision;
  • Correctly worded litigation venue, jurisdiction and law provision;
  • Permission clause to evaluate business owner’s personal credit;
  • Personal guaranty language;
  • Well-designed signature block.

Experienced debt collectors see firsthand how not having one or more of these items can make it more difficult to collect overdue invoices. As a result, all too often companies are forced to accept discounts or longer payment plans.

Two years ago we created the free ebook: Credit Application Handbook.*  It has 20 sample credit applications and a detailed explanation and sample wording of each item to consider for inclusion on a credit ap. Many of our clients have used this resource to improve their credit ap or standard terms and conditions.  We have had several claims where these modifications helped us be more successful with their delinquent accounts.

We’ve used the National List for decades to help us find excellent collection litigators for our clients.  We hope this free resource will help you and your clients be better prepared for when customers default.

Dean Kaplan

Dean Kaplan, The Kaplan GroupTKG Website Logo

  • 2250 King Court, Suite 50
  • San Luis Obispo, CA  93401
  • 805-541-2733

*Please be advised that this is not intended as legal advice from NL. Changes to laws, statutes, regulations and costs can and do occur. We recommend that you contact an attorney for advice specific to your legal matters and your state.

Categories: ARM Industry, business debt, Business Relationships, collection industry resources, Credit applications, NL Insider, Payment Card Industry

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1 reply

  1. Great article Dean. Please add a paragraph of the evils of arbitration clauses!

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