How to set up a credit application for new customers

Why it matters

Most bad debts start with a customer who was given terms without a check. A short form and a few calls cost less than one unpaid invoice.

Signed terms also give you the right to charge interest and recover costs, if you write that into them.

The steps

1. Decide who needs one. Anyone who wants to buy on account. Cash customers do not need to complete it.
2. Collect business details. Legal name, trading name, ABN, ACN, address, phone and accounts contact.
3. Collect who owns it. Names and addresses of directors or owners. Consider a director guarantee for larger limits.
4. Ask for trade references. Ask for two or three suppliers. Call them and ask about payment history.
5. Check the ABN. Look up the ABN, entity name and GST status on ABN Lookup.
6. Set the limit and terms. Base the limit on expected monthly purchases and risk. Write the terms, such as 30 days from invoice date.
7. Add your terms of trade. Include late payment interest, recovery costs and the right to stop supply. The customer signs to accept.
8. Review the limit. Look at limits twice a year. Raise a limit for good payers and lower it for slow ones.

Worked example

Example Plumbing Supplies Pty Ltd gets an application from Example Builders, who expect to buy A$8,000 a month.

Check	Result
ABN lookup	Active, GST registered, name matches
Reference 1	Pays in 28 days, limit A$10,000
Reference 2	Pays in 35 days, limit A$15,000
Limit set	A$8,000, or about one month of purchases
Terms set	30 days from invoice date

The limit of A$8,000 matches one month of expected purchases. The business reviews it after six months of payment history.

Common mistakes

• Giving terms without a signed application.
• Skipping the reference calls.
• Setting a limit above what you could afford to lose.
• Never reviewing limits.

Next step

Use the Credit application form generator first. Then see how accounts payable and receivable work together.

Sources

• ABN Lookup