Credit applications: useful tools in knowing your customer and in binding your customer to contractual terms.(credit column)

Many companies require their customers buying on credit to fill out a credit application. At its most basic, the credit application provides an introduction of the potential customer to the potential seller, both as to its legal organization as well as its financial ability to purchase goods or services and to pay for them. In order to make an informed decision about the future customer, you will want to obtain legal and financial information, and the credit application is the easiest and best time to obtain it.

A credit application can also be the initial offer or the initial acceptance that creates the seller's side of the contract. A well-drafted credit application can set forth the terms under which the seller is willing to do business with the customer. When a credit application is signed by the buyer, it can also be the demonstration of "acceptance" of the terms and conditions set forth on the credit application. This article will briefly examine the information which should be requested on a credit application, and then will consider a recent case in which a court had to examine the impact of a credit application.

Credit Application Checklist

The requirement that a completed credit application must be furnished prior to purchasing on credit provides an incentive to the potential buyer to provide information that it will be unlikely to willingly provide in the future. This incentive gives the seller the ability to gather information not only to determine the buyer's creditworthiness, but also to gather information that may be useful in the future if collection efforts become difficult. Thus, it is useful to review a list of information that may become handy later on.

A credit application should, at the minimum, gather information concerning who the potential customer is as well as information that can be verified concerning the customer's identity. Specifically, the application should elicit information concerning the customer's organization.

* Is the customer a corporation, limited liability company, limited partnership, general partnership, limited liability partnership or sole proprietor? Knowing this will help you determine whether someone else may be responsible for payment if the customer does not pay.

* How long has the customer been in business? Obtain the date the customer was organized, where it is organized and the federal tax identification number.