Looking to offer B2B credit? It’s a smart move that aligns with industry standards for flexible payment options. While offering credit terms has benefits, managing delayed payments is crucial and it all starts with your business credit application template.
In this blog post, we’ll guide you through creating a digital B2B credit application template. This template will gather essential information to help you make informed credit decisions. By defining credit limits, setting payment terms, and establishing guarantees, you can safeguard your cash flow and ensure timely payments.
What is a credit application?
A credit application in the context of business-to-business (B2B) transactions is a document that companies or organizations complete when they want to apply for credit from another business. It serves as a formal request for credit and provides the necessary information for the creditor to assess the applicant’s creditworthiness and determine whether to extend credit.
Suppose a manufacturer wishes to establish a credit account with a particular supplier to streamline their procurement process. The manufacturg company would need to complete a credit application provided by the supplier. The application would typically require the manufacturer to provide their business name, address, tax identification number, contact details, and relevant financial information.
Why offer B2B credit?
Offering B2B credit application provides significant competitive advantages for businesses:
- Encourages customer loyalty: Offering credit shows trust and value, fostering strong, long-term relationships with B2B customers.
- Drives customer preference: Favorable credit terms attract more B2B customers and give your business an edge over competitors.
- Expands purchasing power: B2B customers can afford more of your products/services, leading to increased sales volume and profitability.
What are the risks businesses face when offering credit
The stats of B2B credit
- Late payments in Australia average 10.4 days overdue, causing cash flow strain.
Another estimate shows an average payment delay of 26.4 days, equaling a two-month delay for a 30-day credit term.
- A survey indicates 5% of B2B sales based on trade credit are uncollectible, with increased delayed payments and 54% of firms reporting past-due invoices.
- Small businesses in Australia are owed $26 million in unpaid invoices, impacting cash flow and leading to business failures.
- Business owners spend around 12 days per year collecting overdue payments.
These statistics highlight the importance of managing credit effectively to mitigate risks and maintain healthy cash flow.
Risks of offering credit to B2B customers
- Cash flow impact – The standard credit terms range from 7, 21 to 28 days. Waiting for payments can reduce your business’s cash flow, impacting your ability to purchase replacement or other products from suppliers. Businesses opt for debtor finance to manage this risk. Failure to service the debt can impact your credit rating while potentially risking bankruptcy.
- Reduced profit margin – Credit sales can also impact your profit margin. While the impact is only felt in the P&L ( profit and loss) statement, businesses may fail to consider the impact when pricing their services and products.
- Large debts – If your business is exposed to large transactions, unpaid debts create a huge dent in your financial health.
These issues can combine to increase the risk of business failure. Per an estimate, 90% of small businesses in Australia fail because of cash flow problems. In a report, the ombudsman of Australian Small Business and Family Enterprise highlighted that small businesses are owed $20,000 or more in late payments. About 14% are owed $100,000 or more as late payments.
How can a business credit application form help mitigate risk?
To balance risks and advantages of offering credit, a B2B credit application form helps simplifies the process of applying for credit and getting approved while reducing errors in specifying credit terms.
It does this by:
- Gathering crucial information: The credit application form collects essential details about the applicant, such as business name, contact information, financial statements, trade references, and credit history. This information helps assess the creditworthiness and financial stability of the applicant.
- Creditworthiness assessment: By reviewing the information provided in the credit application form, businesses can evaluate the applicant’s ability to meet financial obligations and determine their creditworthiness. Factors such as payment history, financial ratios, and references help gauge the applicant’s likelihood of making timely payments.
- Risk profiling: The credit application form enables businesses to assess the risk level associated with extending credit to a particular applicant. By analyzing the applicant’s financial information, credit history, and references, businesses can determine the level of risk they are comfortable taking.
- Setting appropriate credit terms: Based on the information gathered from the credit application form, businesses can establish suitable credit terms for the applicant. This includes determining the credit limit, payment terms, interest rates, and any applicable fees. Setting appropriate credit terms helps minimize the risk of non-payment or late payments.
- Decision-making: The credit application form provides businesses with the necessary data to make informed decisions regarding credit approval. By carefully reviewing the applicant’s information, businesses can accept, modify, or decline credit requests based on their risk tolerance and the applicant’s creditworthiness.
- Legal protection: The credit application form often includes terms and conditions that outline the rights and responsibilities of both parties. This helps protect the business by establishing clear guidelines for credit usage, payment terms, late fees, dispute resolution, and any legal remedies in case of default or non-payment.
Key information to include in your business credit application template
Whether it’s a paper or online credit application, your template should inclued the following infomration:
1. Contact Information – The mandatory field in the form captures vital contact details, including the business name, shipping and billing address, tax identification, the business owner’s contact information. The credit application form must include fields to capture:
- the name of the business
- landline number
- mobile phone numbers
- email addresses
- business address
- Accounts payable contact
2. Business details – Your credit application form needs to capture full business details to ensure you know whether you are dealing with a trust, sole trader, association, company or partnership. Make sure the form captures these specific details of the business:
- Australian Business Number (ABN)
- Australian Company Number (ACN) in case of a registered company
- Registered business name
- Names of directors
- Registered business address.
- Contact details and name of trustee in case of a trust
- Length of time the business has been operating.
3. Financial information – This information is vital to assess the firm’s ability to pay you. Ensure the credit application form captures these details:
- Bank details, including bank account name and BSB (Bank State Branch)
- Bank location
- Accountant’s details
- Recent financial statement reviewed/audited by an accounting firm
- Permission to carry out a credit check.
- Debts and assets
- Profit and Loss statement.
4. Trade references – The form should capture trade references from a minimum of three other suppliers and their contact details ( full business name, mobile number, ABN, and email address).
5. Directors’ Guarantees – Ensure the credit application requires individual directors of companies to provide a written guarantee that they will clear the debts in the event their company is not able to pay. In case the business goes into bankruptcy or liquidation, you can hold the directors responsible for the payment of outstanding debts. Your credit application form needs to capture contact details, such as email address, mobile number, and street address of directors.
6. Payment terms – Set the payment terms in the credit application form in direct, simple, and unambiguous language to avoid misunderstandings and disputes. These fields should specify
- The limit of credit you provide
- The period of credit; usually ranges from 7, 14, to 21 or 28 days of purchase.
- Types of payment you accept such as cash, debit or credit card, cheque, online payments, BPAY, or EFTPOS
- Late payment fee that applies beyond a standard credit term. This can range from 30 days to 60 days.
7. Terms and Conditions – This is a vital section in the credit application form that ensures your B2B customers have read and understood your terms and conditions. Your company’s credit team and legal teams can work together to form a credit policy and specify these terms. For instance, it can include that your company will perform a credit check and make a decision on extending credit after
- checking the company’s registration with an ABN Lookup
- contacting the referees to assess payment history
- carrying out a credit check
- obtaining a cash sales history
- evaluating the business’s liabilities, assets, and debts
- securing a guarantee.
This section can also include information on
- how and by when you will inform the firm of your decision
- that you reserve the right to decline credit
- and chase debts in case of failure of payments.
If you decide to extend credit, ensure you specify the credit limit, default terms or the penalty, credit terms, and other conditions.
You can also include a section on the collections methods you will use. This explains the actions your business will take if the firm fails to pay. Businesses typically will send an invoice initially, followed by reminders, and if this fails, they can take legal action and engage a collection agency to pursue payments.
Download your free business credit application template
Offering B2B credit and ensuring you receive payments on time can be challenging without a streamlined process. Download the free credit application template for business to make the credit application process seamless and error-free.
Business credit application FAQs
Q – What are the key requirements for a business credit application?
The key requirements for a business credit application in B2B transactions typically include providing business information (name, address, contact details), financial statements (balance sheets, income statements), and trade credit references from suppliers or vendors. These requirements help lenders assess the creditworthiness and payment reliability of the business seeking credit.
Q – How long does it take to get approved for a business credit application?
The time it takes to get approved for a business credit application can vary depending on several factors, including thesupplier/creditor’s internal processes, the completeness of your application, the complexity of your business, and the type of credit you’re applying for. In some cases, you may receive a decision within a few days or weeks, while in other instances, it may take several weeks or even months for a final approval. It’s advisable to contact the business directly to inquire about their estimated timeline for reviewing and approving business credit applications.
Q – What factors influence the approval decision for a business credit application?
The approval decision for a business credit application in B2B transactions is influenced by factors such as the business’s creditworthiness, financial stability, payment history, industry conditions, collateral/guarantees, cash flow, business plan, legal compliance, management experience, and economic/market conditions. These factors help businesses that offer credit assess the risk and creditworthiness of the business seeking credit.