B2B Credit Application Guide for Mid-Sized Businesses

Are you among the many mid-size businesses that issue credit without requiring those customers to fill out a credit application? Or if you do ask for one, are you consistently following up to check the validity of the information provided?

In this B2B credit application guide, we’ll cover why it’s important to use business credit applications to determine your customer’s creditworthiness, what details to include in your application form, the steps to follow in creating a credit policy and best practices to implement regarding credit applications. 

What is a B2B Credit Application?

For your business’s healthy cash flow, it’s vital to both ask for and verify financial information from the companies that want to do business with you on credit. And that starts with a business credit application.

A B2B credit application is a form or document that a business uses to collect information from potential customers who want to use credit to purchase their goods or services. It usually includes both personal and financial information that helps the business who would be issuing the credit determine the applicant’s creditworthiness.

Why Use Credit Applications?

Delinquent accounts, obligation defaults, payment failures. All of these unfortunate situations can be the direct results of not effectively assessing and managing credit risk before doing business on credit with new customers.  A B2B credit application is a useful tool to help you identify businesses that need careful evaluation before you extend credit. It’s critical for the financial health of your own business to ask potential  customers for their financial information–and verify it–so you can get a clear picture of any risk you may face.

What Details Should You Include in the Form?

You can make the credit application process simple or complex. If you don’t have a lot of time or manpower for following up on the answers, then it’s probably best to keep the application form basic. The important thing is to be consistent with your process, making sure that you check that the information provided is true and accurate.

A basic, but useful B2B credit application form will include the following:

• Date of application
• Amount of credit desired
• Name of the company, physical address and website
• Other names the company may do business under
• General and Accounts Payable contact information
• Names of principal owners along with addresses and social security numbers
• Business type–corporation, proprietorship, partnership
• Industry or nature of the business
• Number of years the business has been in operation
• Number of employees
• Annual sales
• Bank references
• Trade reference information
• Bankruptcy history–business and personal

The form can also include your business’s credit policies and conditions for credit, payment terms, interest rates and any applicable fees or penalties.

A more in-depth application can boost your confidence when it comes to credit decisions. You may not want to ask for additional financial information. If not, for a price you can get a commercial credit report on a potential customer. But that extra cost to you will add up over time. 

A comprehensive form can help you evaluate a few more essential factors about a customer:

Their profitability–from looking at their expenses and revenues you can get an idea of whether they’re making money or not.

Financial ratios–debt to equity, debt to asset, quick, operating cash flow, working capital and current ratio are all valuable metrics to look into.

Cash flow–because a customer’s cash flow will ultimately impact yours, you want to find out if they havesufficient  cash flow coming in from operations, investing and other activities.

Debt levels–Check to see how much debt a potential customer has. If it looks out of balance with the other financial information you’ve gleaned, think twice about extending credit to them.

Industry evaluation–compare the customer to similarly sized companies in their industry. 

And don’t think you need business credit applications from only  new customers. The creditworthiness of long-standing customers needs to be checked if it’s been a while since you last checked or if they’re asking for an increase in their credit limit.

Steps of the B2B Credit Application Approval Process

Your credit department should have a standard procedure for cross-checking the application before approving it.

Step 1: Verify that the application is complete

Each data point is important for making an approval decision. You must check that all the information asked for has been provided.

Step 2: Cross-check customer trade references

After you’ve made sure the application is complete, you want to start with contacting all the customer’s trade references. This step helps with early fraud detection.

Step 3: Analyze data from the credit bureau

Make sure to check the credit bureau report, including credit score and credit history, before you approve the amount the customer has asked for.

Step 4: Credit approval

If all the customer’s information checks out okay and their credit score is good, then you can feel confident in approving them for the amount requested.

Best Practices for B2B Credit Applications

It should be the golden rule of business credit applications: Make sure to follow up on the trade references that your new customers provide on the application. 

Surprisingly, a large number of credit professionals make the common mistake of not following this guideline. And that can be costly. You’ve asked for this information for a reason–to determine how risky issuing credit to a particular customer could be. The trade reference is a knowledgeable resource and should be able to vouch for the borrower’s  level of reliability.

In addition to checking out their trade references, there are some more in-depth questions you can ask the references or the potential customer themselves to glean more telling financial information.

Here’s a list of questions to ask a trade reference:

• Does the customer pay some bills on time and others late? Could this be because of seasonality?
  
  
• Does the customer exhibit delinquency much of the time or just sporadically?
  
  
• Does a seasonal pattern emerge with regards to the timing of their payments?
  
  
• Has the customer ever had a payment rejected for lack of sufficient funds?
  
  
• Is there a consistent pattern to ordering and making payments?

And a few queries to ask directly to the customer:

• If there’s evidence of poor payment history, is it a one-off, due to personal reasons or something else?
  
  
• Would you accept cash or COD until your credit is approved?
  
  
• What are your long-term plans for the business?
  
  
• Who are some of your bigger customers?
  
  
• Do you extend credit to your customers and do you have credit risk management measures in place to protect yourself?
  
  
• Are there any legal actions–lawsuits, bankruptcies, judgments, liens or filings against you or your business?

Conclusion

The success of your business depends on many factors. Ensuring that the customers you extend credit to are a low risk is one of them. Be consistent in your efforts to vet them thoroughly and you’ll eliminate one of the pitfalls of allowing customers to pay on credit.

Payference is an all-in-one cash management tool for mid-sized businesses. Find out more about how to manage credit riss and how automating your accounts receivable can help you achieve efficiency and increased cash flow with a short, informative demo.