by: Andrea Schlack

All too often business people center their growth strategies upon “getting the sale” as opposed to what happens after the job is delivered and money has not been paid for the job. This is through no fault of their own. The goal of this and future articles is to help businesses determine those strategies for credit management that can help minimize bad debt losses.

Credit Applications vs. Credit Agreements

The first and most critical step to better receivable management is to “know your customer”. Name recognition or a prior business experience is not sufficient criteria for granting credit. All businesses fluctuate; what was good yesterday may not be true today. There are lessons to be learned from the numerous well-known companies that have seen their demise over the past several years.

The two variables to be defined in all credit transactions are “Who is this customer?” and “Will I get paid?”. These can be defined by the proper use of an established application and agreement. Those will help facilitate your ability to verify stability, viability, and predict potential risk of new customers.

There is a difference between an application and an agreement, so you need both. According to Webster’s Dictionary an application is “a form used in making a request”. Agreement is defined as “harmony of opinion, action, or character, an arrangement as to a course of action, or a contract duly executed and legally binding, the language or instrument embodying such a contact”.

Simply put, an application is your customer’s request for terms. It provides the grantor relevant, verifiable information by which informed decisions can be made while the agreement defines under what condition credit will be extended. A properly worded agreement protects a lender’s rights and remedies. It is very important that a completed agreement be required from all customers.

One way to verify the information on an application is to consider these points:

• Is the application filled out completely?
• Did the customer provide you with a physical address as requested?
• Is the provided address a commercial property, a “mail-drop” or a home-based business?
• Did your customer provide you with ownership information including names and addresses as requested?
• Are the phone numbers provided listed to the business that is requesting credit?
• Did your customer disclose all their banking information as requested and did they include their account numbers?
• Has the customer crossed out or altered any of your terms without your consent or approval?
• Are the references verifiable and of value to meet your needs?
• Did your customer sign and date the agreement?

Non-paying customer’s cost the company lost revenue, lost time that could have been better spent with productive accounts, and wasted resources.

Be cautious of the customer who rejects or refuses your reasonable request to fill out an application and agreement completely. Credit agreements are an accepted business practice in today’s credit heavy society; he who refuses to provide adequate verifiably information may have something to hide.

The Verification Processes

Extending credit terms simply because an agreement was completed can leave a vendor vulnerable to high risk, slow, or non-paying customers. In order to maintain a low percentage of bad debt, it is recommended that all applications be verified and periodically updated.

There are numerous “fee based” reports that provide easy to read, statistical data necessary when evaluating credit worthiness and are a cost-effective solution to making the “quick decision”. Dun & Bradstreet or Experian reports, for example, use public records and subscriber information as well as company provided details as the basis for their reports. The accuracy of any report will depend greatly upon how often report data is re-verified.

On-line public records are the fastest and easiest way to verify information. The majority of states, counties, and cities provide “real-time” data on the web that offer a wide range of detail such as verification of a corporation’s charter, identify shareholders, confirm current ownership, provide details of pending litigation, judgment awards, UCC searches, and other related business or trade names associated to your customer. Identify the type of business conducted, provide business license information, identify any name changes, and stock ownership transfers. In many cities you can even see driving tickets that have been issued to an individual.

The Internet provides additional resources for instantaneous verification. Those same tools utilized by credit reporting companies are available to the web-savvy businessperson at no or low-cost. However, the information obtained might not be the most current, so you need to be careful.

Search engines such as Lycos or Google provide sources to verify addresses and phone numbers. Outwardly this may seem to have little importance, after all what customer would intentionally provide a “bad address” or a “bad phone number”? How could they get their completed jobs if they did not provide a good address for delivery, and how can the customer confirm or proof the work processes requested if the phone number isn’t right? Remember the steps you take before granting credit to help you identify those customers who would do anything to get “free work”.

Addresses are something you really need to be aware of while verifying information. Over the past 10 years the business of providing “virtual” offices such as mailbox rentals or “common-space” office suites has grown to a multi-billion dollar industry. Mailboxes Etc and UPS have more than 5,000 franchises nationally while HQ Global has nearly a thousand locations in more than three hundred cities. Cellular phone usage is growing at a faster rate than land-based lines. There are thousands of companies that allow businesses to operate in disguise. While these operations may cater to small and/or home-based businesses that potentially could be very profitable and well run organizations, they also provide a safe haven for slow and non-paying customers. Credit grantors need to be wary.

Common web titles you need to be aware of and that may indicate a virtual office are:

• Business Services
• Conference Centers
• Mail Services
• Office Suites
• Packaging and Shipping
• Fax Service
• Boxes and Bags
• Copying and Duplicating

If during the verification process you suspect an address is a mail drop, call the listed company and simply ask if they rent mailboxes. If the answer is “yes” ask if your customer is renting from them. Also, if the phone number provided by the customer is not listed or appears to be a cell phone ask for the main number to the company and verify it. “No” is always the answer to a question not asked.

Following Practices

Remember the procedures established by your company are a means to protect your bottom line profitability. Your processes for extending credit should not be perceived as an impediment to any ongoing business relationship with customers who are genuinely looking to do business with you on an honest basis.

This article was an excerpt from an upcoming CD-ROM offered in cooperation with Printing Industries In/IN Association and its’ author. Future articles will provide other solutions to the most prevalent problems associated with managing and collecting accounts receivable. Your ideas and suggestions are welcome. For more information, contact Andrea Schlack at [email protected].