Credit decisions: When you skip the application

For most credit managers, a credit application is a vital step in the credit approval process. It’s a document that neatly outlines all the pertinent information that a credit manager needs to know about their customer, from its corporate legal name to the number of years they’ve been in business. No step epitomizes the oft-repeated mantra of credit management, “Know Your Customer,” quite like the credit application.

Why it matters: Despite its importance, credit managers at times forgo a credit application, leaving them vulnerable down the line. While operating without a credit application is not ideal, credit managers may have to consider alternatives when a customer doesn’t agree to sign one, potentially leaving less experienced credit managers on unfamiliar terrain.

“If you can’t get a credit application at the end of the day, you have limited opportunities for recourse because you don’t have a document with the customer saying, ‘I am asking for this product in advance, on open account terms, and I am going to pay for it at a later date,’” said Brett Hanft, CBA, credit manager at American International Forest Products (Beaverton, OR). “If you are choosing to sell without one, my recommendation would be to get every other piece of credit information you have access to—bank references, trade references, a balance sheet or financial statements.”

Without a formal credit application, it can be much harder to predict a customer’s payment habits. “If you don’t have a credit application signed, you won’t have a contract, so there is no agreement over terms and conditions,” said Matt Jameson, Esq., Jameson and Dunagan, P.C. (Dallas, TX). “Your credit application is going to have terms and conditions that are uniquely tailored to your business, and if you are the one extending credit, you’re going to want to have business conducted on your terms.”

A credit application also clearly lays out who you are doing business with, meaning this simple document could be what stands between you and truly knowing your customer. “One of the most important things you can ask on a credit application is for your customer to identify their complete corporate name and if they’re operating under any other corporations or entities,” Jameson said. “You are identifying who you’re doing business with from a name standpoint. Without a credit application, you might not have any information on the official owners of the entity that you’re doing business with.”

Legal issues are further complicated when you are unable to concretely say who you’ve extended credit to. “I had a case where there was no credit application, and there was a question over exactly who our client was dealing with because it was based on the documentation,” Jameson said. “That may seem so simple, but it happens all the time. What ended up happening was because there was no credit application, we had to guess and say, ‘Okay, we think this is the right party based on the address.’ However, it was just a guess and we turned out to be wrong, so we had to amend the lawsuit until we got more information.”

At times, the fast-moving nature of certain industries requires credit managers to act fast, sometimes causing them to initially forgo a credit application. “The lumber market is very volatile, and it moves and fluctuates with pricing throughout the business day,” said Hanft. “We try very hard to move orders forward as quickly as we can. To that end, if we can pull credit report information that is favorable, we are likely to approve one initial order on open terms pending the receipt of a credit application.”

It might seem risky, but sometimes the fast-moving pace of business leaves a credit manager no choice but to approve an order without securing a signed credit application. It is important to remember, though, that it is not totally uncommon for some credit managers to take alternative routes to get the information they need. For those accustomed to working with the federal government, the lack of a credit application will come as no surprise. “It happens often that we do not get a credit application,” said Heidi Lindgren-Boyce, CCE, senior credit manager at Star Rentals (Kent, WA). “If we’re dealing with the federal government or state agencies, they don’t fill out credit applications. We end up going off a contract or a purchase order rather than the standard application.”

It’s important to have standard procedures in place to protect your company from risk when an alternative path is taken. “My team is very well trained on working with customers outside our normal scope. Lindgren-Boyce said. We have our standard operating procedure, but if something is different than normal, then they should all come to me and we can have a discussion. “We have our standard Lindgren-Boyce said. “There was a time when our branch did not follow protocol and did not get a written purchase order. It’s almost one year later and they still haven’t paid, and it’s the military. We didn’t do our part correctly, and without a valid purchase order or contract, we’ve got nothing. We can’t sue the federal government.”

The bottom line: As with any situation that arises in credit, when operating without a formal credit application, it is important to understand the degree of risk and do everything in your control to protect your company from losses. Whether you forgo that initial application in hopes that one will be signed down the line or you are using alternative contracts to secure a transaction, taking the time to ensure that you know your legal customer is important.