When it comes to helping a vendor gets paid, the key is the groundwork you lay before the first invoice is ever sent. Businesses can find themselves out of pocket for unpaid invoices and legal expenses, waiting months—or even years—to recover what’s owed to them.

That is where a well-drafted Credit Application can assist. Having one is not just a formality; it is a strategic tool to protect your business, incentivize timely payments, and establish clearconsequences for non-payment.

A credit application serves multiple purposes: it is an information-gathering tool; a creditworthiness assessment; spells out the relationship between the parties and can be the heart of your debt collection strategy. At its core, a good Credit Application is a contract that binds both parties to specific terms and conditions of the sale.

When you extend credit to a customer, you are giving them an interest-free loan. The customer receives goods or services now, with the understanding that payment for those goods or services will follow within an agreed-upon timeframe. What happens if the customer doesn’t pay? That is where the Credit Application can act as the vendor’s first line of defense.

What Should a Credit Application Include?

1. Legal Name of the Customer
   This might seem obvious, but it’s surprising how often businesses that extend credit miss this critical detail. If your customer is “Ace Best Supermarket,” what is the true legal name of the entity? Knowing the exact legal name of the business you are extending credit to ensures you are dealing with a party you want to extend credit to.
   
   
2. Business Structure
   Is the customer a sole proprietorship, a partnership, or a corporation? Each carries different implications for liability. For example, a sole proprietor will be personally liable for the debt; while a corporation is its own legal entity. Personal liability by the principal of the corporation would require a separate personal guarantee of the corporate debt. The vendor should insist on personal liability from the principal of the business, if the business is new or lacks established credit.
   
   
3. Financial Information
   Understanding your customer’s current financial health is crucial. Ask for details like annual sales, number of employees, and years in business. A brand-new company might not be as creditworthy as an established company. Even established businesses can pose credit risks. The vendor must evaluate each situation individually.
   
   
4. Banking Information
   In the event of non-payment, having your customer’s banking details can be invaluable for judgment enforcement. If you need to enforce a judgment, bank information is always a good starting point.
   
   
5. Trade References
   Request at least three trade references and actually follow up with them on the customer’s creditworthiness. Is your potential customer paying their current vendors on time? Reaching out to those references can reveal red flags that can save you money and aggravation later.
   
   
6. Authorized Signature
   The Credit Application should be signed by an authorized representative of the potential customer. This act formalizes the relationship because it presumes the customer has read and agreed to the terms and conditions of sale.
   
   
7. Terms and Conditions
   This is where you build in protections for your business and incentives or penalties for the customer. You should include provisions for:
   
   
   • Early Payment Incentives: Encourage faster payment of invoices by offering discounts for early payment.
     
     
   • Late Payment Penalties: Impose finance charges for payment made after the invoice due date. This will incentivize prompt or early payment by the customer.
     
     
   • Attorney Fees: Shift the cost of collection and/or legal fees and court costs to the defaulted customer, in the event of non-payment. You should not be out-of-pocket for your collection efforts.
     
     
   • Choice of Venue: Specify the location where any disputes will be adjudicated. For example, I have two clients based in Queens County, NY, that require that all litigation based on the sale to take place in their home County, regardless of where the customer is located.

Why Does a Credit Application Matter?

A well-drafted Credit Application isn’t just another business form—it is a safeguard you put in place to help you with problems in the future. When disputes arise, it can provide a clear roadmap to resolution of the dispute.

I have seen firsthand how these documents are used in litigation. Judges rely heavily on the terms and conditions in the signed Credit Application to determine the total damages they can award; including recovery of finance charges and attorney’s fees. Without the signed Credit Application, the creditor cannot collect additional damages beyond the face amount of the invoies(s).

While the principles of a Credit Application can apply to all written contractual relationships, certain industries particularly benefit from these protections:

• Wholesale Distributors: Whether it is food, electronics, or other goods, wholesalers can extend significant sums of credit, very quickly, to their customers.
  
  
• Commercial Printing: Printers frequently deal with orders requiring rapid production and the expectation of payment terms, making a credit application essential.
  
  
• Professional Services: Attorneys or Accountants can use their retainer agreements to include provisions ensuring they are compensated not only for their professional work, but also the cost of carrying the unpaid balance, together with the cost of debt collection; protecting them in the event of non-payment by the client.

Final Thoughts

Drafting a credit application isn’t just about protecting your business—it’s about setting the tone for a professional and transparent relationship with your customers. By clearly outlining expectations and consequences, you create a framework that encourages timely payments and minimizes your risk. And, if things go bad, you will have the tools you need to help recover everything that is owed to you.

A Credit Application is more than just a piece of paper. It is a promise—a promise that your business will be treated fairly. It is also a promise made to your customer that you will take the necessary steps to protect your business interests. If you take the time to get a Credit Application signed by your customer, your bottom line will thank you.

Elliott M. Portman is a seasoned attorney focusing on commercial debt collection and litigation. With decades of experience, he has helped countless businesses protect their interests and recover what’s owed to them. For more insights and legal expertise, visit PLG – NY.