There are 2 basic principles critical to the extension of credit.
1. The ability to repay a debt
2. The intent to repay a debt
If you can verify the intent of your potential customer and his or her ability to repay the debt, the decision to extend credit or not should be relatively easy. Your credit investigation should quantify ability and intent.
How do you verify the applicant’s ability to repay a debt?
Start with your applicant’s income and assets. Consider verifying their income by having them provide copies of paychecks and bank statements. When dealing in a corporate credit environment, financial statements should be enough to provide this information.
How do you verify the applicant’s intent to repay debt?
Past behavior is an excellent indicator of future behavior. A consumer credit report is a great starting point. There are many reporting agencies to choose from. Three of the larger, reputable agencies are Equifax, Experian, and TransUnion. In the corporate environment, the best way is to contact bank and trade references.
When obtaining a credit application, the applicant should provide the following information:
- Applicant Company Legal Entity Name (including any d/b/a’s)
- Corporate Address
- Telephone
- Fax
- Website
- EIN (Employer ID Number or Federal Tax Identification Number)
- Principals’ Legal Names (and SSN / DOB’s / Addresses if requiring a personal guarantee)
- Banking References including banker’s name and contact info
- Trade References (at least 3)
- CPA contact information
- Amount of credit applied for
- Requested Terms: Any special terms requiring a “meeting of the minds” (i.e. finance charges, late fees, personal guarantee, authorization to pull credit on officers, etc.)
Once the credit application is submitted, it’s imperative that you verify the information. On any point, if you find a discrepancy, discuss it with your potential customer.
- CONFIRM CORPORATE IDENTITY: For most states, the Secretary of State website provides a way for you to verify the corporate status online. Print the information and attach it to the application to keep in your customer’s file.
- PHONE NUMBER: Dial it. Did they answer with the name given or another name?
- VISIT THE WEBSITE: Print the home page and keep it in your credit file. Look for any information that may help you with your decision like press releases, news, info on suppliers/vendors, etc.
- CONFIRM EIN: There are online sites to facilitate EIN verification.
- CONFIRM PRINCIPALS: In the even that you require a personal guarantee, you may want to verify the validity of the individual’s address. If the potential risk is substantial, pull credit reports on the guarantors for further insight into their intent and ability to pay their personal debts. This could become a personal debt if the company defaults.
- OBTAIN BANKING REFERENCES: You may contact their bank and request a reference, however, the bank may decline to give you any information. If so, ask your applicant to provide a recent bank statement.
- OBTAIN TRADE REFERENCES: Naturally, people provide references they know will give a good one. However, if you look on your applicant’s website, you may find other suppliers/vendors that might give you a more objective reference.
- OBTAIN CPA INFORMATION: It’s not necessary to contact the CPA during the processing period, but should the applicant go into default, the CPA may be of value.
Make sure you document all the information you gather during the credit investigation. Keep all the information in your customer’s file. You will need it in the event that they default.
Upon completion, determine the amount of credit you are comfortable extending to your new client. Any discrepancies need to be discussed and if you feel the explanations are insufficient, you may wish to reconsider extending terms to the applicant. Any applicant hesitant about providing information should be a cause for concern.
The credit application is an invaluable tool should the customer default. Keep detailed records together with the credit app in your customer’s file. It’s and excellent idea to scan the documentation onto your hard drive, as well.