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Using a Commercial Credit Application as a Debt Collection Tool

Collecting information about a debtor is a key factor in collecting on delinquent accounts. A credit application can be a valuable asset in gaining information about the debtor if all of the pertinent information is on the application.

CREDIT VERIFICATION
Prior to extending credit, the credit history of the applicant should be looked into. Typically, applicants will provide references from sources that have already extended credit. In most situations, 3 -5 references are sufficient to validate credit.
To begin investigation of the applicant’s credit history, including the credit history of the personal guarantor, the application should include a statement that authorizes the creditor to verify the information in the application, including contacting the applicant’s and personal guarantor’s references.

ASSET DISCLOSURE
The main function of the credit application is to determine whether the applicant’s financial condition is strong enough to permit the creditor to risk extending credit to the applicant. All credit applications should request information regarding the applicant’s assets. The applicant should be asked to list where their operating bank accounts are located.

TERMS OF PAYMENT
The credit application will also spell out the terms of payment. If interest or finance charges are going to be charged on any delinquent accounts, in the event their Net terms are less than 30 days, it should also be included in the application. All invoices sent to the applicant should also contain information regarding interest and finance charges.
A statement that discloses the fact that the customer will be responsible for paying cost  of collection and any attorneys fees incurred during collection of outstanding debts should also be noted in the credit application.
Note: For these additional charges to be legally enforceable, the application must be signed by the applicant. Merely adding these charges to invoices and/or Statement of Account in not sufficient to be able to enforce collection of these charges.

RESPONSIBILITY OF CUSTOMER TO PROVIDE UPDATED INFORMATION
Should there be an instance when pertinent information on the credit application changes after the application is filed, it is the responsibility of the customer to submit the updated information to the creditor.  For example, your corporate customer completes the application and then the business is sold to new owners without any notice to you, the creditor. It is a good suggestion to include language in the credit application stating that the customer is responsible to notify you, the creditor, within 30 days of any change in the ownership or business type of the customer company.

CHOICE OF LAW AND VENUE
Your credit application should indicate by which State law any disputes shall be governed. For example, “any dispute arising under this Agreement shall be governed by the laws of the State of New York” and that the customer agrees that “any civil action may be brought in the County of Erie, the State of New York unless otherwise required by the laws of the State of New York.”

PERSONAL GUARANTEES
Personal guarantees often will make the difference in collecting on past due account compared to obtaining a judgment against the business entity only. Obtaining personal guarantees should align with your credit policy.

A credit application can provide valuable information if properly utilized. Not only can this information be used to verify an applicant’s credit history, but it can also be used to collect unpaid accounts. In addition, a well-written credit application can do much more. By taking the time and effort to review and revise a creditor’s credit application, the odds of recovering delinquent accounts can be increased dramatically.