Credit limit application forms are a useful way of finding out the financial capabilities of a new client or customer, before you agree to provide them with any form of credit.
Remember, any service you provide ahead of payment is credit, so checking your customer’s financial viability is important to make sure they will be able to settle their invoice in full and on time.
By asking them to fill out a credit limit application form, you can find out the basics of your client’s finances, and decide whether or not to allow them a line of credit – and if so, for how much.
What is a credit limit application form for?
A credit limit application form serves several purposes – firstly, you’re looking to make sure you’ve got full identifying information and contact details for your customer; secondly, you’re aiming to ensure they can pay their bills; and thirdly, you need to arrange agreeable terms for the provision of credit.
To do this, your form needs to include certain questions, including the full name of the customer or company, contact address and the type of business they are engaged in.
You might also want them to specify a certain means of payment – whether it is cheque, bank transfer, Direct Debit or something else.
Finally, you’ll usually want to specify a credit limit, along with a period within which the account should be settled – you can ask the customer to suggest their desired limit and repayment period, but ultimately it’s up to you to decide whether this is acceptable or not.
Proving the claims
A credit limit application form will often ask for some evidence to support the amount of credit that is being requested – and while this is important for your own checks before approving the new account, it should also be treated with healthy suspicion.
If your would-be customer provides you with business references, you should be confident that they are legitimate, and are not simply the person’s friends lending a helpful, positive-sounding voice to the proceedings.
You may want to find independent business references through your own investigations of the company, rather than rely on the word of those suggested by the applicant.
Getting the money
Don’t forget to get the details you need in order to actually claim your money from the client – these are a normal part of a credit limit application form, so you may as well get them upfront.
You may need both the business bank account number and sort code, along with details of the bank where the account is held.
It’s often wise to identify a specific person at the client company to contact with any queries about payment – an individual in the accounts department, or the person who handles the finances in a small business.
By dealing with a named individual, you can avoid later receiving mixed messages or being passed between company directors if they attempt to delay or avoid paying you.
Credit Limit Application Forms: Proving the claims
So you’ve followed the guidance so far, but you don’t know what to do with the completed application form?
Well, there are several avenues to pursue before deciding whether you trust the customer to settle their account in full and on time.
In some cases the information you receive back will be clear-cut, while in others it could be more of a character reference, which you’ll have to interpret as best you can.
Even this latter kind of qualitative, rather than quantitative, data can help to provide you with some confidence when entering into a new credit arrangement with a client.
You should make sure you get business references from suppliers of your potential customer chosen by you – and not just from those listed by the client on the credit limit application form.
Find out how long the relationship has been established, and how much credit the referee offers to your potential client, as well as how long they take to settle their bill each week, month or quarter.
Remember that a large amount of credit offered over a long time can equate to quite a small amount in a shorter period – so be certain of the sums when you’re working out how much the client can afford.
And when another business approaches you for a reference on behalf of one of your clients, reciprocate the favour by giving full and honest information – just as you’d expect when asking for a reference to protect your own finances.
Banks usually won’t provide a reference without the account holder’s permission, so if you’re requesting bank references, make sure your client knows about it and has approved their bank to give a statement.
Any such application is referred to as a ‘status enquiry’ within banks, and you may need to pay a fee, but you’ll receive a standard response where anything less than “considered good for your figures” should ring alarm bells.
The bank’s fundamental loyalty remains with its customer – the business you are considering approving credit for – but references of this kind can still be useful for small accounts where the risk level is low to medium.
Credit agencies are perhaps the best known method of checking a client’s financial viability, and can often give you a very rapid response via an online database.
Their opinions are based on fairly full financial data – any missed past payments, lending from other providers, county court judgments and so on – and can help to give you a complete picture of what’s going on in terms of your client’s accounts.
Pulling it together
Wherever you get your credit information from, it’s important to balance all of it when deciding whether to approve the application.
In many cases, for the smallest accounts you handle, it might not be worthwhile carrying out a full check, so consider briefer processes for low-value clients and reserve the full treatment for those who represent the greatest risk if they fail to pay.
Our debt recovery partners, Safe Collections, helped produce this guide. You can find out more about the services they can provide here.
You can find lots more help and tips on all aspects of business funding on ByteStart. Here are a few of our popular guides to help make sure you get paid on time and boost your cash flow;
- The way to get paid – 12-Step Action Plan to stop customers from paying you late
- 8 signs that a small business may be approaching insolvency
- ByteStart’s Guide to insolvency, liquidation and bankruptcy for business owners
- Improve your cash flow – 7 ways to make sure your business gets paid on time, every time
- Collecting overdue payments – a step-by-step guide for small businesses
- 10 late payment excuses used by customers – and how to deal with them
And these will help you with other business funding options;
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- How peer-to-peer lending offers start-ups and small businesses a new funding option
- The secrets of getting a business bank loan
- 5 things you should know if you want to attract business angels
- Crowdfunding – a new alternative for small and start-up businesses looking to raise money
- Finding finance for your new business – funding advice for start-ups