Part 1: Credit Applications With Stewart Wilkinson of National Collection Services

Welcome to the first edition of a ten part series of the National Collection Services cashflow discussion.

Over the next ten weeks we will discuss credit applications, credit checks, PPSR securities, debtor finance, trade credit insurance, debt collection, legal services, liquidations, valuations and asset disposals and then finishing with business turnaround.  The series will consist of interviews with industry experts providing an insight into the business services available to protect you.

In Part 1 this week, I will discuss the importance that Credit Applications play in your trading relationship with customers. NCS provides expert advice with credit applications and I will touch on a few key issues outlined below.  If you or anyone you know needs the services of a debt collector or credit applications please email me stewart.wilkinson@natcollection.com.au or call 0447 474 222.

Question – What is a credit application?

A credit application is a document that your potential new customer completes so you can establish who you are actually trading with. Many times, customers are either sole traders, a company or a Trust structure that can become problematic if your relationship ends. It is important if your customer has several entities, that each of their entities sign a credit application and terms of trade with you. We also recommend that you obtain purchase orders and regularly review your clients credit limits and reconcile them against your accounts receivable ledger.

In effect, a customer is obtaining finance from you where you provide your goods or services for an interest free period, imagine the hoops you have to jump through with a bank to get a $100,000 line of credit? Well you are providing the same to your customer and for SME’s it is vital the credit approval process and credit checks are thoroughly scrutinised. You will approve a credit limit and payment terms and make a risk assessment at this point.

Question – What are terms of trade and why are they so important?

Terms of trade outline your trading relationship with your customer.  The T&C’s can describe when an event of default occurs, how to attempt to resolve the dispute,  outline key times to lodge disputes (for example if you sell perishable goods) , the point in time where stock being delivered enters possession of the purchaser. If you trade with interstate customers, your T&C’s should provide a Jurisdiction clause so you can nominate in what state in Australia you wish to issue legal proceedings.

Some other key points are adding indemnity recovery costs including legal fees and administration fees, default interest on overdue invoices and most importantly there needs to be a clause on the PPSR which we will cover in the coming weeks. Obtaining security over your assets can in some circumstances prevent you from receiving a preferential payment if your customer becomes insolvent but also allows you to pick up your goods in certain scenarios.

Question – How do I get a personal guarantee?

Many clients tell us that PG’s will not be provided by a lot of customers. Whilst this may be true with larger customers we certainly recommend obtaining them from SME’s where possible. It means if their company enters insolvency, the Director or Guarantors become personally liable. If the guarantor owns property, you will have the right to caveat or register a mortgage if your PG document reads correctly. I have seen many occasions where a client obtained a PG 10 years ago where the Director forgot one existed which ultimately led to the debt being paid.

Question – Should I update my credit application and terms of trade?

I don’t think it hurts every 12 – 18 months to review your clients credit applications. There could be a change of directorship or shareholding with your customer. They could have changed address or in some cases, they have not paid their ASIC renewal fees and become struck off, meaning the company is deregistered and no recovery action could commence without the costly expense of reinstating the debtor company.

With the tsunami of insolvencies expected post covid credit applications are  protection measures worth some special consideration. If you would like to talk to me directly please email stewart.wilkinson@natcollection.com.au or call 0447 474 222.

Next Week we will hear from George Wolf of Creditor Watch to discuss credit checks, credit reports and e-alerts plus more..