Ultimate Guide to Business Credit Applications


Empower your entire organization to do their best credit decisions

What is a credit application and why is it important?

What is a Business Credit Application?

As a business grows, the owners and operators may ask themselves if they need to start offering credit terms to their customers. Credit terms, also known as trade credit, supplier credit or vendor financing is when a supplier sells goods or services to a customer with a payment due date predetermined in the future. Credit terms are one of the most common types of financing between companies.

The "buy now, pay later" payment practice accounts for trillions of U.S. dollars in amount firms are owed on any given day.

Asking a client to fill out a credit application is the first step to offering credit terms. 

“The key goal of a credit application is to assist the seller in learning as much as possible about the applicant before making a decision to extend credit,” according to the National Association of Credit Management’s Principles of Business Credit.

A credit application assists the seller in four stages of the buyer-seller relationship: before extending credit, during the credit relationship, during problems in a credit relationship and during litigation, according to NACM.

Components of a Credit Application

First, it's important to understand the components of a credit application. Making sure you request the correct information, and the client completes their application properly, could mean the difference between getting paid and not getting paid.

A proper credit application will include the following at a bare minimum:

  • Company Name, Address and DBA if applicable, Phone Number, Website
  • Legal Type of Company, Years in Business and Federal Tax ID Number
  • Bank Reference
  • Trade or Vendor References
  • Financial Documents
  • Sales Tax Exemption Certificate
  • Signature Acceptance of Credit Terms and Amount of Credit Being Requested

These components are the basic ingredients in a credit application, but there are an almost infinite number of other types of information that could be requested of a potential client.

The most common trade credit terms are when payment is due within 30 days. This is typically referred to as Net 30. Payment due in 60 days is referred to as Net 60. Terms that are called 2%10 Net 30, mean a customer gets a 2% discount if they pay within 10 days of the invoice date. Otherwise, the full amount is due within 30 days.

Why a Credit Application is Important

A credit application allows the seller to make informed decisions about a customer’s ability to meet credit obligations, to limit the seller’s credit risk and get a better understanding of a customer’s business, according to the NACM publication. The application also allows the company to better implement their credit policy.

The top three reasons sellers should have their customers complete credit applications:

  1. A Credit Application is the First Step to Learning About Your Customer. A credit application helps sellers learn as much as possible about their customers before making a decision to extend credit, NACM says. A credit application should be the first step in the onboarding process of a new customer. 
  2. Window Into Customer's Ability to Meet Credit Obligations. A credit application allows the seller to make informed decisions about a customer’s ability to meet credit obligations. At the very least, the seller will get some very basic background on a prospective customer.
  3. Limit Seller’s Risk. A credit application helps prevent delinquent payments, bad debt and financial loss. An accurate and up-to-date credit application is one of the best ways to minimize risk. The application also allows the company to better implement their credit policy.

Even if a client’s initial orders are small, having them fill out a credit application as part of the onboarding process is still a prudent first step to getting some financial background on the customer. Know Your Customer (KYC) guidelines incorporated in credit applications help verify the identity of your customer.

Having a customer complete a credit application can help increase sales of a company’s products to new customers as well as to existing customers as their business grows, according to NACM. The agreed upon terms, conditions and the guarantees are a legally binding contract and will make a significant difference in the collections process and can be relied on should litigation take place if a customer cannot pay.

For a lengthier and more comprehensive list of reasons for why credit applications are important, see this article here.

Advantages and Disadvantages of Credit Terms

The main advantage for companies receiving credit terms, is that it improves cash flow. It’s better to pay for goods and services after a company has received them and in some cases after they’ve already sold them on to their own customer! These terms are also typically zero interest up until the due date.

In many cases, small businesses can’t get any other type of financing. So if they don’t have the cash, credit terms may be the only way a company can buy goods and services.

Of course, the flip side for the sellers or the credit providers is that offering terms delays the revenue. And, of course, credit providers are taking on an additional risk. What if they aren’t paid back on time? What if they aren’t paid back at all?

But the advantages outweigh these risks. Credit terms improve customer loyalty and can increase sales.

It’s low risk and high reward -- if proper due diligence is followed and you utilize a comprehensive digital credit application.

Nectarine Credit

Here at Nectarine Credit, we offer sellers the ability to manage all of their credit applications digitally in a secure database for free. What sets Nectarine Credit’s offerings apart is our secure bank account balance checks, as well as vendor payment history.

We also allow credit seekers, or buyers of goods, to create their own credit profiles for free by filling out a credit application. They can then send their profile on to sellers who ask them to fill out their paper applications. Instead of templates and filling out credit applications again and again with the same information, Nectarine Credit allows credit seekers to create and manage their own profile. You will never have to fill out a paper application again. 

And, do we really need to remind people that faxing credit applications is no longer necessary? Digital is the future.

If you'd like to see a demo of Nectarine Credit's platform, contact us here.