Building a Credit Application

So…   you decided to start a business.   You worked hard to develop a product, saw it through from the idea phase to making some sales.   Now you make it, very well actually, and more people want it… but maybe they can’t pay all at once.

What happens when a customer asks for payment terms? If you work on a cash basis only and require payment before services are rendered, stop here.

Payment terms and how to issue them will be covered in another article, however it is important to discuss how you screen your customer to grant these terms.

The credit application is a tool used by businesses of all sizes to aid in assessing credit risk, worthiness, and to assign a credit limit for which your customer may place an order without guaranteeing cash on delivery.  It is a legal document which coincides with your financial strategy and should be used whenever a customer cannot pay the balance in full at the time of the sale, or when services will be rendered before payment is made.

Why ask your customers to complete an application?

  • Helps with collections efforts should your customer default
  • Demonstrates repayment history of your customer to ensure you will be paid according to your agreed upon terms
  • Provides clear record of your customer’s business experience, growth, potential for growth, and allows insight into the future relationship
  • Provides a legal document to assist with your own future lending needs- demonstrating your financial strategy and policy

What should be included on your application?

  • All sales related contact details for your customer
  • All accounting related contact details for your customer
  • Estimated monthly sales
  • Payment methods and authorization
  • Credit references (at least three, with relationships over six months) and contact details
  • Banking references and contact details
  • Location data relevant to the sale (one location, multiple locations, etc)
  • Your new customer’s account number (bill to an ship to if applicable)

When should an application be requested?

  • Upon a new working relationship (ie. When a sale is made)
  • If the purchase and credit request exceeds your tolerance of risk
  • When your customer wants to do business but cannot pay the full balance

Some questions you may be asking….

  • I trust my customer and I know they are going to pay me. Do I really need to do this? Why?

It isn’t really about trust.   You are in business to make money, not give away product.   You may come across many buyers who can clearly afford to pay (Wal-Mart, Amazon, GE, Giant Eagle, etc) however having this document on file indicates your awareness to risk.   Of course you are going to issue credit to A-list vendors

  • It is not a requirement. However, on average 5% of sales go delinquent, and 1% of sales is written off as bad debt.   If you sell $1M in a year, you’re going to lose up to $10,000 while trying to collect up to $50,000.   Why not make it easier?
  • It could be used by your customer service team to set up new customers
  • It could be used by your accounts receivable team to make collections efforts
  • It will be a quantifiable method of providing customer data to investors, potential buyers, or if you consider an IPO
  • What point in the sales process do I ask for an application?
    • After the sale agreement is made, tell your customer that you may need a credit application (should the dollar value be above your tolerance).
    • Consult with your finance policy holder (accountant, CFO, credit risk manager, etc) on if an application should be filled out
    • Let your customer know if an application is needed
  • What if the sale is terminated because I asked for an application?
    • A legitimate business will respect your need to verify information. Your relationship should be strong enough to allow you to protect yourself from risk
    • Allow for exceptions in your risk strategy to allow a one-time purchase with at least contact information for the buyer
    • Advise your customer that COD for a select period of time (per your risk strategy) can take place of a credit application
    • Use your gut to determine if this customer can be shipped without an application.  Limited exceptions should be made, but policy should be flexible
  • Where do I keep this information?
    • Electronic storage is always best in a folder that can only be accessed by select members of your finance team and senior leadership.
    • Information should not be shared with third parties, and credit card information or personal data should never be stored in written form.
  • My customers pay me on time. I am not worried.
    • Credit applications are like insurance. You don’t need it until you need it… for reference, data, or any other purpose.  It doesn’t cost anything to make one, and it saves a lot of time and energy in the long run.

Ready to develop an application?   Need yours reviewed?   Talk to a professional to make sure your level is risk is covered by your application.   You work hard for your products, and should want to protect yourself against loss.

This information is based on the experience of Ryan Dietrich, consultant and principal at Finance Jack, LLC.   Ryan has over 10 years of accounts receivable experience, and has led credit activities at Fortune 500 companies and small businesses alike.   Ryan has developed policy, managed risk, and led teams in collections at all levels.     Finance Jack focuses on strategic management in the accounting and finance areas of small business, startups, and scaleups.   To contact Ryan Dietrich please email


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