How To Conduct A Research Before Extending Trade Credit Terms

Extending trade credit terms to customers is quite in fashion these days. A number of business owners, be it an owner of a large IT firm or a small computer parts manufacturing company, are offering this facility to their valued customers so as win over their customers. Though several business owners depend on their “gut instinct” while extending credit terms, this facility usually comes with several risk factors. And the most crucial amongst them is the risk of not getting paid at all. It is a more significant problem with the small business owners who have limited funds, unlike the large houses. It is often impossible to make out whether or not the customer is willing to or has the ability to pay to back according to the agreement. This is where the importance of doing a proper research comes in before extending such credit terms.


The very first thing that you must focus on is creating a good credit policy. You need to put every points, clause and terms in a paper. Give a special emphasis on detailing. It will not only clarify that expectations that you have from your customers but will also act as a legal document that you can use to sue the customers for nonpayment. In addition, ask your customers to complete the credit application. You can also provide such applications online. It will help you to familiar with the customer's background whom you are about to extend credit terms.

Ask them to give information about the name and address of their business, resident address, the name and branch of their bank, account number, number of years in business, the business’ structure, outstanding loans, and federal tax ID number. Also ask them for at least three references along with their address and contact details. Based on these information you need to conduct a research from your end to verify the facts. Next come checking the trade references of the customer. Verify with the bank (where they have account) as well as with the other references about the payment practices of your client. Apart from these, you must also run a credit check. This can be done easily. There are several  local credit bureau and business financial-rating service providers that offer such services against a small fee. They will help you to gather information about whether or not the customer is facing any outstanding judgment as well as about their payment practice.

Even though your customer have a good credit rating and a market reputation. It is advisable to ask him/ her to personally guarantee the credit. To do so you must confirm that the business owner has enough assets to act as a guarantor. For this, he/ she need to submit their personal bank account information and their personal financial statement.

Another factor that you must consider is asking your customer to sign a security agreement as well as the UCC financing statement. Such  agreement enables you to repossess your products if the customer refuse or fail to pay you on time. In addition, it is advisable to set a financial and time limit while extending any kind of trade credit terms.