Commercial Credit Applications: Setting Your Business Up for Success
Mike McDermott, President of Trade Confidence, a full service accounts receivable consultancy firm, and Philip J. Eboli, VP of NCS Companies, a debt collection agency, are two industry leaders with 20+ years of experience in accounts receivable. They recently sat down to discuss how businesses can protect themselves with a robust commercial credit application that asks the right questions and includes the right terms and conditions. Continue reading to learn insights and a few tricks that can help your business right now.
Mike: Philip, from what you see of the customers you deal with, do they all have credit applications? Do you advise that they do? Or what's your experience with seeing credit applications in a debt collection scenario?
Philip: I don't see a heck of a lot of credit apps being put in place for service organizations, whether they're software or even SaaS. I see more on the goods sold and delivered side. But I do believe that any company that does extend credit would serve itself really well by putting a credit app in place. Not only from a source to have good data, but also for banking information, references, and things of that nature that can really help a credit manager, collection manager, or accounts receivable manager determine the financial health of a potential customer.
Mike: 100%. I would add that companies are used to filling out credit apps, so it's not something that’s a wild new concept. So, if your business is not doing it today, I would encourage your business to do so. It shouldn't be that heavy of a lift. And if the buyer balks at having to fill out a credit application, it can be a red flag.
Phil, if you have something in your credit application that says that if the buyer is more than 30 days late, they are responsible for late fees, or if a third-party collector needs to be involved, the buyer agrees to cover those fees. Do you see those things as being enforceable, first of all, and something you'd recommend having?
Philip: I think, by and large, what I see is that you have a customer that'll agree to an order form or MSA or a contract, and then the creditor, my customer, my client, will also reference their corporate terms and conditions; which is in a different location from where you can click on a link to see the general broad terms of doing business with our customer. And within those terms, you'll see that they have the right to ask for interest and fees, should a customer end up in arrears or past due, and ultimately, reasonable attorney's fees if an account has to be put into collection. So a lot of times they have that covered. But if there's a single source credit app that is put in place, that is tangible and is signed, then it takes away some of the murkiness surrounding those terms and conditions, which may be hidden in the background. While enforceable, they're not always present at the time of the execution of an order form, a contract, or an MSA.
Mike: Is there anything else that is top of mind for you as far as what you like to see when you've got a a debt collection you're going after where you say, "Okay, I feel good that I'm going to be able to collect this because my client had you these terms or other collateralization, securitization, anything else that gives you some ammunition when you're going to collect the debt?."
Philip: I can't tell you how many times I've seen a scenario where an order form, or a contract, or an MSA has been signed by what you would think would be a representative of the customer seeking the credit. And then the account inevitably ends up in collections, and when we make our reach out to thank the customer for the business they've given our client, they'll say, “Well, the person that signed the order form or the MSA or the contract wasn't authorized to do so.”
So, while a credit app may be an additional step, smart thinking would say that the additional step could provide a ton of insulation to cover your receivables. So if you have that credit app in place, you know the terms are spelled out step by step, and it's executed by a stakeholder. You can really enforce your terms and conditions a lot more effectively that way than getting into the semantics of a debtor who's claiming that the contract is null and void because the person who signed it wasn't authorized to do so.
Mike: One other thing I wanted to ask you, Phil, on the application itself, I think what's probably a trump card for you is knowing that you've got more securitization, is the personal guarantee, right? From your perspective, talk to me about how the collection conversation changes when you've got an assigned PG.
Philip: Well, a personal guarantee guarantees that the signature of the PG, as we call it, is not only commercially responsible to pay it back or pay the phone funds or loans back, but they're also personally responsible should their commercial interests fade or completely sunset. So, it's something that's an effective instrument, particularly with expensive goods sold and delivered. On the service side, there may be a little bit of a chance to alienate. If you insist on a PG, it really depends on what you're selling, how you sell it, how you deliver it, and the terms of the contract or the order form. But certainly, a PG is an effective tool to protect the receivable, and I 100% agree with you.