If you are going to extend any significant credit to a customer — other than accepting a credit card, in which case the credit card company takes care of credit validation — consider taking some or all of the following steps:
- Credit application: This document solicits important information about the customer’s background, how it operates, how long it has been in business, trade, business references, and bank references.
- References: Check the customer’s references to make sure that the customer has paid other creditors on time.
- Credit reports: Consider obtaining a credit report from a credit rating agency, such as TRW, Dun & Bradstreet, or Equifax. To get information on individuals, you often need their consent to do a search; the consent can be contained in the credit application.
- Guarantee: If the customer is a company with minimal assets, request that the owners personally guarantee the company’s obligations.
- Security: A security interest provides you with the benefit that, if the customer doesn’t pay, you can sell or take back the goods (as opposed to being simply one of the customer’s unsecured creditors). In order to do this, you need the customer to sign a Security Agreement and UCC Financing Statement covering the goods.