One of the things I enjoy doing is sharing the challenges that some of our clients are experiencing. By learning from their issues is how we continue to be a work in progress, avoid the same mistakes, and improve on the performance of our credit risk management systems. 

The other day we received several files for collection from a new client. Upon opening the attached files, we were very pleased with all of the documentation that was provided. Usually, we need to request emails or statements but right from the get-go, all the documents to support the claims appeared to be there. In particular, at first glance I was especially happy to see the new customer credit application included with each file. So often we are able to glean very important company and individual details that facilitates the collection process. 

Looking carefully at each application, I noticed something strange. They seemed like old documents. I could see a lot of smudges, a couple of fingerprints, and discoloration of the ink. Scrolling down the pages and getting to the end to confirm signatures and dates, I was a little taken aback when I realized the applications were prepared in the late 1980’s and early 1990’s. Yes, that’s about 30 – 35 years ago! 

Hoping that there might be a more current credit application, I called to the client to inquire. Unfortunately, what they sent was what they had, and the reason was that since their customers were always such good purchasers and payers over the decades, getting an updated credit application never really seemed to be on their radar. The problem now however is that for many companies, this pandemic has been like a terrible tidal wave appearing out the blue that has negatively impacted even those decades old “good as gold” customers, laying bare the pitfalls in a credit risk management system. 

The one thing about life is that it’s always in motion and the same idea applies to a credit application, especially from the 80’s and 90’s. For example: 

  • Original owners who built and operated the company for many years have passed the reigns over to their children or sold it to unrelated parties who have only kept the company name. 
  • The people in charge of purchasing have also transitioned, either to other employers or retired. 
  • Locations have changed from moving just down the street, to relocating to a new city, or even a new state. 
  • Company and personal telephone numbers usually no longer work, and as email was not yet a communication tool, naturally you won’t find them. 
  • The companies that had provided trade references are also most likely long gone, and this is probably true with banking relationships as well, since many local banks have been bought up by larger well-known financial institutions. 
  • And finally, the individuals who signed as personal guarantors are probably no longer contactable.

We all understand that the credit application is often the original document by which the creditor and customer iron out credit limits and terms of sales and payments. It’s also were the creditor can get an overview of just how a company may turn into a long-term viable customer. Furthermore, when the credit application is current and properly executed, it can serve as a very important legal document should things unfortunately go south, and the two entities wind up in litigation. 

Going forward

In view of the new economic normal, now is the time to update what is included in your credit applications. This starts with having a document that accomplishes two things: 

  1.  It requests sufficient financial, trade, and ownership information that will fulfill credit granting requirements. 
  2.  It will serve to support your creditor’s rights should there be a payment issue down the road. This means including a specific interest rate on past due accounts, as well as a personal guarantee. In these tenuous times, obtaining a personal guarantee supported by a personal financial statement and all contact information should be considered the rule of the day. 

Finally, the document should be reviewed by your legal counsel to make sure that it will hold up against legal challenges. 

Although the situation explained above is quite unusual, the moral of the story is that even our best customers could be inundated by extenuating circumstances outside of their control, which could impact their financial viability. When that happens, having all the documentation in order, including an effective and up to date credit application, can’t be emphasized enough. 

This article was edited by Steven Gan.

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