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Using a Commercial Credit Application as a Debt Collection Tool

Understand and Implement the Benchmarks for Building a Well Rounded Commercial Credit Application

Obtaining customer information is a key factor in collecting delinquent accounts. A credit application can be a valuable asset in gaining such information if all of the pertinent company information is on the customer’s credit application.


Credit Verification

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

Asset Disclosure

The main function of the credit application is to determine whether the company’s financial condition is strong enough to permit the creditor to risk extending credit to the company. All credit applications should request information regarding the company’s assets. The company should be asked to list where its 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 company should also contain information regarding interest and finance charges.

A statement that discloses the fact that the customer will be responsible for paying the cost of collection and any attorney’s fees incurred during the 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 an authorized signatory or by an officer of the organization. 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.

To ensure you have the most up-to-date information on your customers, it is recommended that you systematically and proactively reach out to customers every 6 months and ask them to verify the information on their credit application. This exercise should be done no less than annually if twice per year is not possible.

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 accounts 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.

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To learn more about our commercial collection agency services, contact us at 844.937.3268 today!