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title: "Credit Application"
canonical: "https://kb.myframeworks.com.au/space/FRAM/28401362/Credit%20Application"
format: markdown
---
# Overview

No system of credit evaluation is fool proof and a large degree of experience and skill is required by the person assigned to manage credit control. There are established guidelines that should be adhered to in evaluating new accounts and in taking up credit references.

It is equally important to point out penalty charges and deductions at this stage so that any disputes be resolved before the account gets to the collection cycle.

| **Credit Evaluation Questions to consider** | **Description** |
| --- | --- |
| **Who are we dealing with, a Company, a Partnership or an Individual?** | You must obtain full names of owners, partners or officers and all business addresses. A review of the local service directory and a request to the Australian Securities Commission may help with determining the full picture. |
| **How long has the applicant been in business?** | Statistics show that 50% of businesses fail in their first year and 75% fail in their first five years. If you are experiencing problems in collecting debt from companies that are in the risk groups,   
alarm bells should be ringing, and a review of their application is in order. |
| **What bank does the applicant do business with?** | Typically, the supplier of the goods/services ask the purchaser to supply details of his bank account to allow the seller to contact the bank and seek a report on the credit worthiness of the purchaser. These references are useful and should be sought for every new account opened to establish both credit worthiness and the amount of credit that may be given.  
However, it should be borne in mind that the bank has its customers, as well as its own interests to maintain, whilst being careful not to mislead the seller.  
Experience leads a credit controller to read between the lines of a bank reply and to evaluate credit worthiness, taking into account both clear signals from the bank and also unclear signals. |
| **Who are some of the businesses that the applicant is currently dealing with?** | It is useful to have the customer supply names of its major suppliers but again, it must be realised that any contact name given by a purchaser is going to be one that will provide the best reference for the customer. Ensure that any response is properly evaluated. In the event of dealing with a major customer, a reliable credit rating agency may provide useful information.<br>Very often a seller will know other companies selling to the purchaser and it is useful to discuss in general terms the credit worthiness of the purchaser. Again, this has to be treated with caution and information of this nature should form only part of the decision-making process. Factual information such as the date an account with the business was opened, the $ amount for the average monthly purchases of the customer from the referee and the number of days in which the customer paid their account held with the referee should help in assessing the reference. |
| **Seek a Copy of Last Audited Accounts** | This is probably one of the best indicators of credit worthiness particularly if the accounts are up to date. It is important however that the credit controller is able to read and understand a set of financial statements and, if possible, calculate a number of key working capital ratios to assist in the evaluation process. A number of key ratios and application are given below.<br>In the case of a limited liability company, it may be helpful to carry out a search of the company to ascertain further information on the shareholders, directors and details of any debentures or charges registered. |
| **Visit the Customer** | It is likely in the event of opening a new account that the sales rep responsible for the new account will have visited the purchaser to secure the sale. In that situation, the sales rep should be trained to observe the general operation of the business to see if everything appears normal or if there are signs that the account may be a problem. |

Things to look for could include:

- An irate supplier in the office demanding payment.
- The person you are dealing with refuses to take a call from an irate supplier.
- Supplier retrieving goods from the factory or yard.
- Any other indications of financial or business problems.

In the situation where the account is potentially a major one, the managing director or sales director should visit the purchaser as part of the evaluation process.