- 1). Create or download a credit application that asks relevant questions of the applicant. A good credit application should include not only basic contact and company information but should also include questions about income or revenue, credit with other suppliers or vendors, and how much credit the client needs. Also, include a personal guarantee requirement for business customers incorporated or structured as limited liability companies. A personal guarantee makes the owners or directors liable for a debt, even if a corporate structure usually precludes them from liability.
- 2). Gather all invoice and sales information for the credit applicant. Review the invoices and determine an average sales amount per transaction as well as an average monthly sales amount. This will give you an idea of how much the customer typically spends when paying cash. When reviewing the customer's sales and order history, pay particular attention to any orders canceled and any notes made about the transactions. If the customer canceled orders due to an inability to pay, this should weigh heavily in your decision to extend any credit limit at all.
- 3). Obtain a business credit report on the customer from a major reporting bureau. Companies like Dun and Bradstreet, Equifax and Experian all provide business credit reports for a modest fee. If you plan to extend credit to many business customers, consider subscribing to a creditor plan that allows you to perform many monthly credit checks.
- 4). Review the customer's business credit report. Note high and low credit limits other creditors have extended. For accounts with high credit limits, determine if the account is a revolving account that allows a small monthly payment or a net-terms account the customer must pay in full each month. Give more credence to net-term accounts --- a better indicator of the customer's cash flow.
- 5). Establish a credit limit that allows the customer to continue making typical purchases based on past invoices if the business has a good or excellent credit rating. For example, if the customer purchases an average of $5,000 monthly, then extending a credit limit in that amount might encourage the client to purchase more often and pay down balances as needed.
- 6). Write a letter to the customer explaining how you determined the credit limit offered to the business. Offer to periodically review credit purchases and increase limits if the company makes timely payments.
- 7). Create and send timely statements that allow adequate time for the customer to remit payments.
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