The Credit Application Form is a crucial instrument that enables you to evaluate the creditworthiness of potentially new customers. Your Terms and Conditions of Sale establish the guidelines under which you are willing to extend credit to those potentially new customers. By integrating these two elements, you can significantly decrease the likelihood of write-offs, ensure that credit limits and terms are optimized, and enable your sales team to optimise their efforts in a profitable manner.
COMMON ISSUES
We typically encounter the following issues within organizations:
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Many companies assign the responsibility of ensuring the comprehensive completion of the Credit Application Form to their credit department. We suggest that the sales department, which directly interacts with new customers, should assume full responsibility for the form’s accurate completion.
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The Credit Application Form often fails to ask the right questions, resulting in the absence of vital information needed to meaningfully assess the creditworthiness of a new customer.
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The Terms and Conditions of Sale are usually lengthy, convoluted documents drafted by attorneys. They are seldom understood by the sales department and salespeople, and often not even fully understood by the credit department. How can you expect your customers to adhere to Terms and Conditions that your sales and credit personnel do not fully understand?
THE CREDIT APPLICATION PROCESS
An effective credit application process involves the following:
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The information requested should be meaningful and necessary. The sales department should assist the customer and related customer personnel in completing the form comprehensively. However, this assumes that the form has been succinctly and thoughtfully designed, asking only the most relevant questions, and that it is fully understood by the sales team.
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This process should be initiated at an early stage in the prospecting cycle. It can be demoralizing for a salesperson to invest months in acquiring a new customer and finally have the customer ready to place an order, only to discover that the customer is not creditworthy, rendering the salesperson’s efforts futile. If you have a long prospecting cycle, consider conducting an initial quick pre-vetting of the customer’s potential credit history through credit bureaus.
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The sales and credit departments need to collaborate in the assessment of creditworthiness. The salesperson is responsible for providing the correct information to the credit department, which is tasked with swiftly and effectively assessing and granting the appropriate credit limits. Credit personnel often give a binary Yes or No response to requested credit limits, rather than adopting a more flexible approach of granting credit limits subject to additional information or conditions. Therefore, the two departments should be working in unison, rather than pursuing divergent goals.
THE DOCUMENTS
The Credit Application Form and the Terms and Conditions of Sale should be separate but interconnected documents, so that each document can be modified independently. It’s essential to ensure that every new customer not only completes your Credit Application Form and signs it, but also acknowledges receipt of your Terms and Conditions of Sale.
It’s crucial to ensure that the data you require for assessing the creditworthiness of new customers is captured by a well-structured Credit Application Form. The rules of engagement need to be clearly articulated in a concise, easy-to-read, and understandable Terms and Conditions of Sale document.
CHALLENGES WITH EXISTING DOCUMENTS
Most companies have developed a Credit Application Form and a Terms and Conditions of Sale document, but we often encounter the following issues:
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The Credit Application Form is not well understood by credit staff and is generally avoided by sales staff.
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The Credit Application Form does not gather sufficient information to enable the credit department to accurately assess the creditworthiness of a new customer.
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The Terms and Conditions of Sale are often not read, and even unreadable, not just by customers, but also by sales and credit staff.
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These documents are frequently drafted by attorneys, using standard clauses that may be inappropriate or inapplicable to the customer’s circumstances. Even if well-considered, attorneys might not fully understand the specifics of your industry or your company.
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The fine print is usually overlooked, and is often in a font size that is difficult to read.
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The forms and formats used do not integrate well, do not align with the credit scoring/assessment process, and are not easily understood or applied by either your sales or credit staff.
REDESIGNING YOUR DOCUMENTS
Keep the following points in mind:
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You need a thorough understanding of your industry and customer requirements, as well as your own company’s financial capacity.
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You must have a clear understanding of the credit scoring model that you will be using to assess creditworthiness.
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The Credit Application Form you are redesigning must align with your scoring system. We can provide you with our recommended scoring system for the commercial sector (business-to-business). Scoring is an essential tool to ensure that you can accurately and scientifically evaluate the creditworthiness of a potential new customer in the shortest possible time. Once your draft Credit Application Form aligns with your scoring system, it’s crucial that your sales team has access to the draft to ensure they understand it and can therefore gather the required information.
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When redesigning the Credit Application Form, consider these crucial factors:
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It’s important to understand who you are contracting with.
This is a common mistake where the salesperson and ultimately the credit department do not understand the legal entity they are doing business with.
You need to know not only the type of legal entity, e.g. that it is a (Pty) Ltd company, but also understand who the underlying owners are, and who is managing or directing the organization.
It’s not just the legal entity’s creditworthiness you need to assess, you also need to investigate the character and behaviour of the underlying owners and/or their management. Often, directors, members, or shareholders who have previously failed in business will resurrect a new legal entity and could either fraudulently, or through misrepresentation, con suppliers into yet again supplying credit to business people who have no intention of honouring the underlying relationship.
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The most crucial aspect of your Credit Application Form is the trade references part.
Why is the magic number of three references requested? Often, four, five, or even six references are vital for you to ascertain the true underlying creditworthiness of a potential customer.
It’s also important that your salesperson obtains the correct type of references. Just having references from essential suppliers is not enough, your salespeople need to probe to find out how your potential new customer has been dealing with non-essential suppliers (of items such as stationery, maintenance of PCs, plumbing, and electrical works).
The potential new customer was previously dealing with another supplier of similar goods or services to those that you provide. It’s essential that your salesperson probes who the previous competitive supplier was, and that this party becomes part of the referencing system. This is to prevent ‘round tripping’, where a customer runs up a large arrear account to supplier A, then moves across to a competitor – supplier B, runs up a similar large outstanding arrear, to round trip to supplier C. Ultimately the industry as a whole is harmed when such a customer has run out of all means of further credit extension and all suppliers (A, B, and C) ultimately face a write-off.
The Credit Application Form must be signed, and the person signing must clearly indicate their name and their capacity within the legal entity. Your Credit Application Form must also stipulate that the person signing must be authorized and must have the capacity to bind the legal entity.
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When redesigning your Terms and Conditions, avoid the following pitfalls:
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Do not end up with an excessively lengthy document that becomes difficult for your sales peiople to explain to a new customer. Often, less is more, so always remember the KISS principle (‘Keep it Simple, Stupid’).
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Ensure that the potential risks inherent in your industry are addressed. Consult with long-standing members of your organization to understand the types of write-offs and risks previously encountered, and how they could have been prevented. Obtain copies of your competitors’ Credit Application Forms and Terms and Conditions of Sale, to make sure you haven’t overlooked any important points.
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Ensure that your Terms and Conditions of Sale align with your credit policy.
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Once again, involve your sales team in finalizing the Terms and Conditions of Sale, so that they understand it and can explain it.
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We can provide you with outlines and formats that enable you to redesign your documents effectively.
NO EXCEPTIONS
Insist on a no-exceptions policy. Exceptions often arise due to interference from senior management. The simplest way to avoid this is to have the senior manager sign and assume personal responsibility for the consequences.
IN CONCLUSION
No goods should leave your premises and no service should be provided until the credit department has approved a credit limit and recorded the new customer’s details.
Provided the above steps are followed, and scoring is done correctly, your ability to secure new profitable sales, with the least potential cost of financing and write-offs, will be significantly enhanced.