The New Customer Credit Investigation

The ultimate responsibility for the establishment of a new customer account rests with the credit executive. It is essential therefore to set guidelines for performing the necessary procedure. The account must be precisely identified with its correct name and address. Additional identifiers may include a customer number (ID#), a D-U-N-S number, a Social Security or government business identification number, etc. for fast, accurate and easy identification. If new customer orders are to be prescreened for credit approval, it is necessary to describe in a procedural document for the benefit of sales and credit personnel what the parameters are for new account acceptance. (Refer to CRF publication “Credit Policy”)

Sales-Supplied Information:

Generally, sales representatives are the company’s first contact with a new customer and the most frequent contact with an established customer. Sales should be an excellent source of credit information. While some salespeople may not be suited by temperament, interest, or experience, and may feel imposed upon when asked to perform credit or collection functions, they nevertheless must be made aware of how important they can be to the process of credit extension.

Some sales personnel are provided with blank financial statement forms to be left with the customer to complete and mail directly to the credit department. Frequently, however, it is desirable to have sales representatives send in the completed form. Also, without asking questions, sales representatives can obtain a great deal of information by keeping their eyes and ears open to benefit not only the sales and marketing functions; but, to enhance the credit partnership as well. They can judge the location and appearance of the place of business and the presence or absence of competition. They can observe the names of other brands and products carried and the personalities of employees and management. To obtain the full benefit of the sales representatives’ observations, a spirit of mutual confidence and cooperation must be developed between the sales and credit departments.

Customer-Supplied Information

There is no better source of information about a business than the business itself. Direct contact with the principals provides the credit executive with financial details, bank and trade references, and other information of importance. How this information is requested and obtained will depend upon the time available for the investigation, the location of the customer, the relative importance of the credit exposure, and the degree of cooperation that can be obtained from the customer.

The Credit Application

The necessary components:

  1. Date
  2. Your company name, subsidiary, division or business unit that the prospective new account request is for. (Important for multi-divisional companies)
  3. Customer bill to name, street, city, state, zip
  4. Customer ship to name, street, city, state, zip
  5. Owners name (can be an individual, group or another company)
  6. Telephone number
  7. Legal characteristic — sole ownership, partnership, corporation or other
  8. Type of business — example: distributor, retailer, wholesaler
  9. Your salesperson’s name
  10. Bank references: name, address, phone number, officer, type of account
  11. Trade references: name, address, phone number
  12. Year business started
  13. Other customers your company sells in the marketing region
  14. Does the subject rent or own premises
  15. Include a statement asking for sales and use tax exemption (resale certificate) to be mailed with the application
  16. (For proprietorship) ask for the owner’s social security # and a “signature/date block” asking their permission to order a personal credit bureau report
  17. Request a blank copy of the customer’s purchase order (front & back). See “Customer Purchase Order” section

The optional components:

  1. How much credit is requested
  2. Listed in Dun & Bradstreet or other credit reporting agency
  3. Buying group affiliation
  4. Home telephone number
  5. Branch operations and listing
  6. Contact name: buyer and accounts payable manager
  7. Salesperson’s comments: competitive brands; condition of business (exterior/interior); condition of inventory; promotional practices, location- rural, suburb, city; description of premises
  8. Credit application number (for tracking purposes)
  9. Fax number

Credit References

Information you want from a reference:

  1. Verification of subject name and address
  2. Highest amount of credit extended to the subject
  3. How long have they been dealing with the subject
  4. Amount currently owed
  5. Amount past due
  6. Payment trend of the subject
  7. Date of last purchase (especially valuable when calling a supplier in your same product line)
  8. Terms by which the customer is being sold *
  9. Is the supplier secured by the subject: (UCC1, letter of credit, guarantee, etc.)
  10. Any NSF checks

* “Terms” are a very sensitive topic relative to credit reference information. Some corporate counsels instruct employees never to discuss terms when requesting or giving references. Please seek advice from your company’s legal sources to ensure consistent compliance to your policy.

Debatable value:

  1. Are you only hearing what the customer wants you to hear?
  2. Try to get references that the customer has not given you, e.g. trade group meetings, or salesperson’s advisement of other product lines being carried.

References become valuable when other sources (credit agency reports) lack sufficient background information.

Character is an important aspect of the business credit decision; however, in most instances credit analysts do not actually appraise character–but rather the reflection of character as revealed by reputation and references.

The easier a form is to fill out, the more likely it will be returned to you. Include return postage on a written credit reference request.

If a phone reference, make sure you get the person’s name and make sure you date the notes taken over the phone.

* Be careful giving a phone reference, you never know who you are talking too. A call-back (listening carefully to the phone greeting) could be a prudent alternative.

Financial Statements

  1. It is good practice to ask a potential customer for their last two fiscal year end balance sheets and operating statement
  2. Generally, a customer that makes a complete financial disclosure is treated more favorably
  3. Financial statements are a means of classifying customers into risk categories
  4. If the prospective customer is approved, the initial financial statement can serve as a benchmark for future comparative analysis
  5. The extent of your credit exposure and/or the importance of your product or service, may dictate the degree of financial information you require and receive
  6. Always save the envelope associated with the financial report:
    1. as verification of when it was sent to you;
    2. if statement is discovered to be fraudulent, and it has been used as a basis for credit extension, the envelope becomes proof that fraudulent information was sent through the mail
  7. Never accept estimated statements or financial statements in round numbers
  8. Always make sure the statement is dated and signed by the owner (if from an accountant, it should be on the accountants stationary and signed by a member of the firm)
  9. If an accountant’s opinion or cover letter accompanies the statement, make sure it is signed by the firm
  10. Consider comparing your customers financial statements to other like customers (same SIC code and sales volume) to determine the subjects strengths and weaknesses to the industry norms

Credit Reports

Types of commercial sources of credit information:

  1. General commercial agency business report, such as the Dun & Bradstreet Business Information Report
  2. Payment experience and trend analysis reports as provided by the National Association of Credit Management, D&B and TRW
  3. Specialized mercantile credit agency reports on businesses in a particular industry
  4. Trade group interchange report.

Purpose and scope of the agency report:

  1. Identification information of the business (where applicable, cross-check with application):
    1. Name
    2. Address
    3. elephone number
    4. Principal owner or Chief Executive Officer
    5. Standard Industrial Classification code (to assist in classifying your customer base)
  2. Agency rating
  3. Agency credit line recommendations
  4. Development of special events
  5. Payment habits
  6. Financial information including facts and trends
  7. Banking information
  8. Historical information on principals
  9. Operational information

Establishing Credit Availability *

It is important for management to furnish a clearly defined statement of what is desired of the credit department. Through this communication, a credit policy can provide the framework for consistent credit decisions directed toward attaining company goals.

Credit limits are a means through which the credit manager may delegate authority for credit responsibility, while at the same time retaining the degree of control necessary to protect the company from excessive losses.

A well-established credit guide line may also prove to check reckless buying on the part of an over optimistic buyer.

* Caution should be used in the terminology dealing with available credit. Some companies use the term “line of credit.” Unfortunately, there has been litigation in which a trade supplier was held liable for a customer’s failure. The court interpreted the phrase as a firm commitment, similar to what a bank would offer its customer. Therefore, “credit availability” seems to have a less obligatory significance and is considered more acceptable. Another often used but potentially hazardous term on the subject of credit is “credit limit.” It has been found to be more customer friendly to use the term “credit guide or guideline” rather than the restrictive “limit.”

Consideration must be given to the expected term of the relationship with the new customer:

  1. Less desirable terms such as: COD, CIA, CBD, become more acceptable to the customer in a one “time sale” situation.
  2. A new customer that will look to you for continued growth should supply adequate information in an attempt to gain workable availability of credit that will support a long-standing relationship.

Two elements that must be considered in credit decision making are TIME and COST.

  1. Too great a delay in gathering and evaluating credit information may cause the loss of an order and possibly the customer
  2. Consideration must be given to the cost of gathering credit information, i.e., credit reports, calls for references, calls or visits to the prospective customer, mail handling, etc. in relation to the potential sale

External factors affecting a credit decision:

  1. Competition
    1. Lenient or strict credit extension policy as it relates to your company marketing objective
    2. Length of credit terms
    3. Lenient or strict collection policy as it relates to your company marketing objective
  2. General business conditions
    1. When demand exceeds supply, the credit manager may have a more conservative philosophy than that normally found in a period of reduced business activity and troubled times
    2. Be aware of localized positive or negative economic conditions even when the general economy may present a contradiction in strategy
    3. When the market for your product is declining
    4. Shortage of raw materials for production

Internal factors affecting a credit decision:

  1. Type of product sold
    1. Stock inventory
    2. Custom designed, engineered and produced inventory
  2. Seasonal or non-seasonal characteristics and shelf-life
  3. Profit margin on product
  4. Credit and collection department staffing
  5. Your company’s inventory is exceptionally heavy
  6. New market ventures and strategie

Initial order:

  1. Automatic approval — cost does not justify a comprehensive review
    1. Blanket approval may be given on orders for less than a predetermined amount (as defined in credit policy)
    2. Approval based on current credit reporting agency ratings (as defined in credit policy)
  2. Orders in excess of “automatic approval” limit must be reviewed through an examination of some or all of the following:
    1. New account application
    2. Latest credit agency reports
    3. Most recent financial statement
    4. Contact with other suppliers and references
    5. Information from prospective customer’s bank
    6. Personal phone call or visit to prospect
  3. Need for additional security may be apparent when all of the above is evaluated

Advising the new customer of their available credit:

  1. Advantages
    1. An opportunity to talk to the customer and introduce yourself and your company to the them
    2. The opportunity to extend some “experienced” suggestions which may help the marginal customer
    3. An opportunity to explain your company’s terms as defined in the credit policy
    4. Reduces the potential for an embarrassing situation later if the customer places an order that becomes held due to the credit limit restrictions
  2. Disadvantages
    1. Customer may feel prohibited from placing a larger order thinking that no more consideration may be given
    2. Customer may be insulted by the results of the evaluation and credit limit
    3. May lose goodwill for your company

The Customer Purchase Order

Buyer/seller relations are consummated by a purchase order document. If the relationship is to bear profit for the seller, care must be taken to follow the instructions and procedures set forth on the document or make the seller amend the purchase order in writing to allow for a variance in the original order.

A significant amount of customer payment deductions are a direct result of a lack of attention to purchase orders. Clearly, failure to follow purchase order instructions “to the letter,” completely justifies the deduction from the buyer’s perspective.

You should insist that all orders be confirmed with a purchase order number and a hard copy or be sure your system can maintain a log of Electronic Data Interchange transmissions. Not having a purchase order in hand, allows you to be manipulated by the buyer’s last minute requests for changes that may be orally communicated to your salespeople. These changes must be confirmed in writing, and where appropriate, you should ensure that the customer’s receiving department has been notified of the changes to prevent delivery problems.

What to look for:

  1. Consistency of information between the customer P.O. and the order subsequently entered into your system. In some industries, the customer unauthorized deduction problem is so bad, that additional staffing to cross-check the following is a prudent business decision. When feasible, compare the:
    1. Name
    2. Address
    3. City, State, Zip
    4. Terms and Conditions of Sale
    5. Number of units on order (line item and total quantity)
    6. Price
    7. Billing and shipping information
    8. Purchase order number
    9. Department Number
    10. Shipping dates
    11. Cancellation dates
    12. Promotional or advertising information, e.g., ad kits, displays, etc.
    13. Special instructions, i.e. permission for substitutions, special shipping information, special labeling requirements, fabrication requirements, etc.
  2. Buyer’s signature
  3. Invoicing instructions
  4. Incentive program information for billing, i.e. quantity discounts, early order allowance, etc.
  5. Does order fit into established credit limit:
    1. If not, take the necessary steps to expand credit availability either by a new review, splitting the order, or obtaining security for the balance over credit limit
    2. If OK allow order to be shipped

Is the New Customer a Fraud?

The essential characteristic of fraud is the intent to deceive.

What to look for on the credit application:

  1. Bill to or ship to name that “rings a bell” as a suspect business
  2. Principal’s name that “rings a bell” as being suspect
    1. Putting 2 + 2 together — comparing and analyzing the data:
  3. Look for discrepancies among the various “tools” you have available (credit application, credit agency report, banking information, trade reference data)
    1. Name consistency
    2. Address consistency
    3. Phone number consistency
    4. Principal’s name consistency
  4. Look for unusually high opening orders inconsistent with other data about the customer
  5. Be suspect of billing and shipping to different locations for small businesses
  6. Look for familiar references
  7. Be suspect of various unfamiliar references
  8. Take note of unsolicited orders — particularly from trade shows

What to do when you suspect a fraud:

  1. STOP and THINK — you’re about to make a serious accusation
  2. Talk to an internal associate and review your facts and suspicions
  3. Contact the unfamiliar references and take copious notes
    1. How do they identify themselves — do they give a name or answer with a phone number
    2. Give as little information to them as possible
    3. If practicable allow many hours or consecutive days between calling unfamiliar references
    4. Do not let them become suspicious of your motive
  4. Contact references you know and can trust
    1. Advise them of your facts and suspicions
    2. Get their reference and opinion
    3. Consult with them about the situation
  5. Where to get help
    1. National Association of Credit Management — Loss Prevention Dept.
    2. Federal Bureau of Investigation — White Collar Crime Unit


New customers represent an opportunity for increased sales and profits. However, certain procedures must be followed before a prudent credit decision can be made. Outlined above is a guideline to help you make conscientious evaluations particularly related to new or unfamiliar customers.

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