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What To Do Before You Offer Credit

Supplying services on credit places your business at additional risk if the customer doesn’t pay (either on time, or at all). The systems you put in place for granting credit should enable you to extend credit to new customers or increase the credit or terms you offer existing customers, while minimizing your exposure to financial risks.

Follow the six steps outlined below to help avoid unexpected cash flow problems caused by late payments, bad debts or even worse, fraud.

Step 1. Get detailed information

Make sure you have a standardized credit application form that customers can fill in and sign, to apply for credit. Use your credit application form to gather detailed information in order to conduct credit and reference checks. This should include:

  • Full legal name of the person applying and the business and any trading names.
  • Business’s internal revenue number, physical and postal address.
  • Head office telephone number, email address, and other contact details.
  • Delivery address, contact details, and name of the person who has authority to place orders.
  • Billing address and contact details for the person responsible for payment.

If any of these don’t seem right, refuse credit until you’re satisfied they are legitimate.

Step 2. Find out more information

You’ll want to know:

  • Who owns and manages the business and if they have a board of directors
  • How long they’ve been in operation, the number of employees and their annual turnover.
  • Which bank and branch they bank with.
  • The personal contact details and internal revenue number of the owners or partners (for sole proprietors and partnerships).

Step 3. Get references and do reference checks

Your credit application should request trade references (with contact details) from other businesses your customer buys from. Remember to ask for, and obtain, signed permission to do a credit and reference check.

Draw up a list of questions for your staff to ask suppliers when conducting reference checks. They could include:

  • When the account was approved/how long they’ve been dealing with the company.
  • Credit limit and terms offered.
  • Current amounts due and overdue.
  • How often they buy, and when their last purchase was.
  • How well they pay.
  • Any significant changes in orders or payments over the last three to six months.

Look for any holes in the references. Are one or more of the references from businesses owned by family members, or related subsidiaries? Have they left off an important supplier?

Use a standard form for your staff to record the company they contacted, when they called, who they spoke to and the answers given. Keep this form with the credit application.

Step 4. Detail your terms of trade

You should make acceptance of your terms of trade part of your credit application form. Print your trade terms on the back of the credit application form or include it as an attachment.

Your staff should ensure customers have signed agreement to your terms of trade before they approve the credit application.

Step 5. Do your own checks

You can do your own informal checks in addition to commissioning an official credit check. Ask people in your networks whether they’ve heard of or dealt with the company.

Find out what their first-hand experiences are. Do an Internet search to find out more about the company, check out their website and visit their premises to get a feel for the financial health of the business.

Step 6. Check through the credit application before approving credit

Have one person do the credit and reference checks and a second (senior) person double-check the details. The person verifying the application should check that:

  • The credit application was completed, with no glaring omissions of required information.
  • The customer has signed the credit application, including acceptance of your company conducting a credit and reference check, and acceptance of your trade terms and conditions.
  • The customer has not deleted any terms or conditions (without your agreement or knowledge) before signing the application.
  • All your systems for approving the application have been followed.


Once you’ve completed these steps you can decide whether to decline or approve the credit application or approve the application at a lower credit limit or under stricter terms until your customer has established a track record with your company.

Advise your approval or rejection in writing, provide clear details of the credit limit and terms that have been approved, and include a copy of your terms of trade.

Note that the resources listed here are meant solely as overviews and helpful information. Please consult experts regarding your specific security needs for your business.