Are you thinking about including a credit option in your business? Extending credit can be a tricky situation. While it can be beneficial to both your business and your clients, it also has the potential to backfire. Even those who had a wonderful track record in the past when it comes to making timely payments and paying their account balance in full can get in over their head when they have a line of credit available to them. Although most people don’t generally go out of their way to not pay their bills, sometimes things happen that make it hard for your clients to make timely payments.
It’s important that you understand the basics of credit controls and learn how to minimize your risks. You can read more about credit controls by taking a look at this post. In this post, we’re going to discuss the importance of properly extending credits and give you some helpful hints. Clients ARM provides a unique service to help your business set appropriate credit lines. To learn more about this great service, give us a call at 206-596-3000!
Alternatives to Credit Lines
We generally recommend offering early payment discounts as opposed to offering a line of credit. Usually, the discount is small. Yet, for some people it is enough that enables (and encourages) them to pay their bill in full.
Another option is to accept credit card payments. When accepting credit card payments, the credit card company is the one who assumes the risk with the client. Your company will receive payment regardless of whether the client pays off their credit card bill.
Clients ARM also provides a free financial tool that can help your clients secure the funds that they need to pay you in full. Hello Finance Manager is our free loan matching program. It’s a great way for you to receive full payment.
Use a Credit Application
However, there may be certain situations, or specific clients, to whom offering a line of credit would be beneficial for both you and the client. If this situation arises, it is important to verify the client’s credit by having them complete a credit application. Make sure that you run a credit check once the application is completed, signed, and returned. Also, check any references that ae provided to you. Clients ARM also suggests that you get a signature for a personal guarantee on any business lines of credit that you provide.
Here is a sample credit application for business that you are welcome to use. You can also use it as a guideline and create your own. Just remember that it is important to understand what you can and cannot ask even on a credit application. Many business websites and legal websites provide items like credit applications for download.
Business Credit Application
Name/Address
| Last: First: Middle Initial: | Title |
| Name of Business: | Tax I.D. Number |
| Address: | |
| City: State: ZIP: Phone: | |
Company Information
| Type of Business: In Business Since: |
| Legal Form Under Which Business Operates:
Corporation ð Partnership ð Proprietorship ð |
| If Division/Subsidiary, Name of Parent Company: In Business Since: |
| Name of Company Principal Responsible for Business Transactions: Title: |
| Address: City: State: ZIP: Phone: |
| Name of Company Principal Responsible for Business Transactions: Title: |
| Address: City: State: ZIP: Phone: |
Bank References
| Institution Name:
|
Institution Name: | Institution Name: |
| Checking Account #:
|
Savings Account #: | Loan Balance: |
| Address: | Address: | Address: |
| Phone: | Phone: | Phone: |
Trade References
| Company Name: | Company Name: | Company Name: |
| Contact Name: | Contact Name: | Contact Name: |
| Address: | Address: | Address: |
| Phone: | Phone: | Phone: |
| Account Opened Since: | Account Opened Since: | Account Opened Since: |
| Credit Limit: | Credit Limit: | Credit Limit: |
| Current Balance: | Current Balance: | Current Balance: |
I hereby certify that the information contained herein is complete and accurate. This information has been furnished with the understanding that it is to be used to determine the amount and conditions of the credit to be extended. Furthermore, I hereby authorize the financial institutions listed in this credit application to release necessary information to the company for which credit is being applied for in order to verify the information contained herein.
_____________________________________________ ______________________
Printed Name Date
_____________________________________________ _______________________________________________
Signature Company Name
More Tips on Credit Extension
When making the decision of whether or not to extend a line of credit to a client, here are a few other things you can do along with processing a credit application:
- Consider the clients past payment history with your company.
- Set out clear guidelines regarding any credit which may be issued. This includes credit limits, fees that will be assessed, interest rates, and late charges.
- Lay out a clear payment plan for the client, in writing.
- Document everything. We cannot stress how important good documentation really is for your business. It is a good idea to keep copies of all documents on hand. If you prefer to go paperless, make sure that you choose a cloud provider that is reputable and is known for its backups and up-time.
- Be sure to follow all guidelines set forth by the Federal Trade Commission (FTC). The U.S. Small Business Administration (SBA) also has a set of tips and suggestions available for you to review when deciding whether or not to extend a line of credit to a client.
- Determine if your company will be handling the payments yourself or if you are going to outsource this task to an outside firm.
Clients ARM is ready to help you set the right credit limits for your clients. We provide a free process review to determine a custom solution and help you implement and manage it. To book your free process review, give us a call today: 206-596-3000.
