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Template showcase: credit application

11 Apr 2017

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By Ben King, Senior Solicitor, Aspiring Law

If you’re a BizClubber, and haven’t yet checked out our growing library of free, member-exclusive legal templates, it’s a must.

You’ll find a selection of key documents that can be tailored to your particular business to help you to implement proper processes and safeguard your operation from problems. Never again can you say getting your legal affairs in order is too time-consuming, or costly.

We’ve recently uploaded a new credit application template to the BizClub® member-only section of the Aspiring Law website. It’s designed to sit alongside your terms of trade – and, yes, if you haven’t seen it, there’s already a template for that, too.

Essentially, your credit application template includes the relevant information you need to capture when considering whether you’re going to allow a client or customer to put goods and/or services on tab.

Our template also features handy hints you might not otherwise think of – for example, if the credit application is from a company, it’s a sound idea to require a personal guarantee. Usually, directors of a company will provide a guarantee in their personal capacity, offering added protection if the business goes bust and has no assets.

I still get somewhat amazed by the risks business will take by not putting the basic protections in place, particularly when extending credit. Bottom line – if you don’t have appropriate checks and balances, then you are at greater risk of not getting paid for services and/or goods you’ve provided.

You might be able to survive if one customer doesn’t pay, but if, all of a sudden, the number of people not stumping up starts growing, your cashflow issues may enter your nightmares.

If you don’t have a system and checklists in place for properly testing potential customers’ creditworthiness, you have no idea who you’re lending money to. Think of it as your personal money – would you just hand over a load of dosh to a stranger down the street who asked, and expect them to repay? That’s effectively what businesses are doing when they extend credit with no checks, balances or terms.

When the proverbial hits the fan, I’ve heard a lot of reasons from businesses why they didn’t have the proper process and documents in place. In the cold, hard light of day, amidst the resultant cashflow crisis, I can tell you all would agree the modest effort to organise the right protections is a walk in the park compared to the financial and emotional distress of chasing large debts, with little-to-no chance of recovering that money owed.

As part of your business’ robust credit application process, always ask for, and check, any references, and be sure to do external searches of the person or company to check their business practices. If you’re not satisfied, do not offer credit.

And, the thing with credit processes, the job’s never really done. To be effective, credit applications should be reviewed regularly – a business that’s in great shape when you first extend credit might be anything but solvent down the track, and you won’t necessarily know, unless you use your processes to keep your finger on the pulse.

Big picture, you also need to be regularly looking at your credit systems as a whole, and making sure they’re robust enough, especially if your debtor levels start to creep up.

Few, if any, business protections operate in isolation. Remember, an important adjunct to a proper credit application framework is a business’ terms of trade. These spell out the agreed terms between the parties – like, for example, the ability to charge interest on late payment, register a security interest in goods supplied and specifying payment terms, including when full payment is expected.

No terms of trade? It will be difficult to charge penalties for late payment, and you might just find you don’t have a fallback to recover goods you’ve let the customer take.

Take my word, prevention is markedly better than the cure, which can sometimes be the death of a business left crippled by one too many short-pocketed, outstanding debtors.