Money Matters

A guide to business credit applications for AR teams

Business credit applications help assess customer risk and protect cash flow. This guide covers what to include, how to evaluate financial health, and ways to automate the process with Sage AR Automation.

Business credit applications are a critical part of credit risk management. When used properly, they help assess the financial health of potential customers and identify any red flags before extending credit. However, many businesses either skip this step entirely or fail to follow up after collecting the information.

In this guide, you’ll learn what to include in a business credit application, best practices for reviewing them, and how automating the process with tools like Sage AR Automation can help protect your business.

What to include in a business credit application

A business credit application can be as simple or detailed as you need. At a minimum, request the following information:

• Business name, address, phone number, and fax

• Names, addresses, and Social Security numbers of the business owners or principals

• Business type (e.g., corporation, partnership, sole proprietorship)

• Industry

• Number of employees

• Bank and trade references

• Bankruptcy history

• Alternate business names

For a more complete assessment, consider requesting financial documents that allow you to evaluate key indicators such as profitability, liquidity, and debt levels.

Evaluating financial health

When analyzing a customer’s financial information, here are some critical areas to focus on:

Profitability

Are revenues exceeding expenses? This helps determine if the business is financially stable.

Financial ratios

Use ratios to assess liquidity and solvency:

• Debt-to-equity ratio

• Debt-to-asset ratio

• Current ratio

• Quick ratio

• Operating cash flow ratio

• Working capital ratio

Cash flow

Look at cash flow from operations, investments, and financing. A positive cash flow indicates a lower risk to your receivables.

Debt levels

Review outstanding liabilities to understand how much additional debt the customer can reasonably manage.

Industry comparison

Benchmark the customer’s financials against industry standards to evaluate how they measure up.

If you don’t want to request financial documents, consider purchasing a commercial credit report, though this can become costly over time. Even for existing customers, a new credit application is a good idea if it has been a while or if they request a credit limit increase.

Business credit application best practices

Sending and collecting the application is just the first step. It’s crucial to follow up with trade references and clarify anything unclear in the application. Here are a few suggestions:

Questions to ask trade references:

• Do they pay all vendors consistently, or are some paid late?
  
• Are there signs of seasonal payment patterns?
  
• Have there been any bounced checks?
  
• Are their orders and payments consistent?
  

Questions to ask the customer directly:

• Are there one-time issues that explain poor payment history?
  
• Would they be willing to pay via COD until credit is approved?
  
• How long have they been in business, and what’s their customer base like?
  
• Do they have their own credit policies in place?
  
• Are there any suits, liens, bankruptcies, or judgments filed?
  

Managing customer credit applications

Managing credit applications manually can be time-consuming, especially when dealing with high volumes. A modern accounts receivable automation solution like Sage AR Automation can help simplify this process with document management tools that:

• Save templates to reduce time spent recreating applications
  
• Send and receive credit applications through secure portals or encrypted email.
  
• Store completed forms and other documents like invoices, proof of delivery, or timesheets
  
• Trigger notifications when it’s time to update a customer’s credit application or run a new credit check
  

With the right system in place, it’s easier to stay organized and reduce risk—while keeping your AR processes efficient and secure.