Granting business trade credit in 5 steps

May 11, 2017

Granting Business Trade Credit in 5 Steps.png

Taking these five steps when granting trade credit to your customers will minimize credit risk and improve your overall accounts receivable collections efforts.

Step 1: Credit Application from Your Customer

Your credit application doesn’t need to be complicated, but it should help you gather information necessary to make a good credit decision. The application should indicate the legal name of the business and ownership; provide banking information, and information on trade credit grantors. Business often provide a preprinted “bank and trade references" list to you, but the importance of your application is that the customer, by signing it, grants you permission to contact their bank and trade creditors for payment history.

Several sources of free sample credit applications can be found online. Entrepreneur.com has a very simple business credit application in MS Word format that may work for many businesses. Microsoft offers a basic business credit template in Word format that covers all the bases too. You can customize either of them with your name, logo and standard terms of credit.

Step 2: Bank and Trade References

Checking bank and trade references is a very common practice, and banks and other credit grantors have procedures for quickly returning the information to you. In the case of the business credit applicant’s bank, you should ask several questions usually on a form you can fax the bank or trade credit provider. First, you want to know what the customer’s average cash balances are, when the banking relationship was first established, how many of the customer’s checks have been returned marked non-sufficient funds (NSF) during the last 12 months, and if the customer’s relationship with the bank is in good standing.

For trade references, the important things to check are the date credit was originally granted, what the high credit has been over the course of the relationship, and how many times in the past 12 months the customer has paid beyond terms.

If you don’t anticipate granting a large credit limit to your customer, and if you receive favorable information, you might skip step 3. The most ideal trade creditors to check are those that are similar suppliers to you.

 Step 3: Check Business Credit Using Credit Bureaus

There are a number of commercial credit bureaus that you can use to check business credit. One of the best sources is The National Association of Credit Managers (NACM). NACM requires you to join your local chapter, but it is a good investment for learning about managing credit. They provide easily obtainable, high-quality products and services including online training resources, forms and publications.

Step 4: Set a Credit Limit

It may take some practice to get comfortable with the process of setting credit limits. Starting low is a good strategy. If a customer hits a low credit limit, you always can evaluate their payment history and the specific circumstances of their needs. You can raise it temporarily, or if you feel comfortable, on a longer-term basis. It should be a routine practice to review all customers’ payment history and credit limits on at least an annual basis.

Step 5: Set Expectations with Your Customer

Tell the customer right up front what their credit limit is. Let them know you can review the limit when there is payment history to review, or in special cases when the customer needs to exceed the limit on a temporary basis. This practice of talking to your customer about their payment history helps set professional boundaries. Make sure to thank customers several times a year when they have shown good payment history. If you start out with a small credit limit and feel comfortable raising it later, make sure you let them know you are raising it because you value their business and want to encourage them to buy more from you.

These 5 steps for establishing trade credit for your customers are strong business practices that will help you reduce your risk. As a bonus, they mean you are likely to do business with financially stronger customers.

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Ed Lette

Business Bank of Texas

Ed Lette is Founder, Vice Chairman of the Board of Directors at Business Bank of Texas. Serving as a licensed CPA since 1983, Ed’s extensive experience in the banking industry has led him to become the founding president of four national bank charters including Business Bank of Texas, N.A., and the chief financial officer of five national banks during his 45 year career. Ed serves as director of the Texas Bankers Association District 4, chairman of the Executive Advisory Council to the School of Business at Texas Lutheran University, and is a life member of the Texas Association of Business.
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