Credit guru Thea Dudley has spent more than 30 years in LBM credit management. Now she’s here to answer your credit and collection questions. Got a question for her mailbag? Contact Thea attheadudley@charter.net
Dear Thea,
How often is it acceptable to ask for an updated credit application? Is there a rule of thumb or a generally accepted number of years to wait before asking for new one?
Signed, Pondering in Pomona
Dear Pondering,
Ever watched a momma duck with her ducklings? They all waddle behind her in a row. Every now and then one goes wondering off and the whole system comes to a halt while momma has to go get that little dude back in line. That is what credit file management feels like. Just when you think you have all your ducks in a row, one shows up completely out of line and challenges your whole system.
This such a sensitive subject for some accounts. There is no rule of thumb. There is whatever your company and/or credit department decides on. It is a very delicate balance between what you need for your files and what you want. Despite the fact that I want a clean, clear, and completely filled-in credit application with all the signatures in the right spots with complete bank, trade, and financials attached, the file rarely looks like that.
Most of the time, I am pleased to see a (mostly) completed credit application in the file, along with the various reports. Annoying, yes, but I also live in a world where asking someone to fill out a credit application sends them into a snit, so I am (mostly) sensitive to it.
Over the years I have had to teach myself how to balance between what I would like and what is acceptable. My rule for “acceptable” over the years has changed but eventually settled on,”What will hold up in court?” (If it ever came to that).
Ideally, I would like a new credit application whenever there is an “event” with the customer’s business: Name change, ownership change, or buy-out. You’re not always aware of the ownership changes so when you find out you like to get it updated. It is not always possible but in my perfect world I get them every time there is that type of activity.
With all the buy-outs, mergers, and acquisitions going on in our industry that brings the question of a new credit application front and center. What happens when your company merges with another or is bought out? Every credit manager I know wants and expects a new credit application from the customer.
The customer doesn’t always see it that way: “Why do I have to fill out a new credit application? Your company bought someone and I have credit there, so deal with it.” Explaining that the situation has changed doesn’t seem to placate some. I find it is often easiest to get the new credit application the moment the acquisition is complete. Giving it a few months or waiting for “the right time” is a lot like having a baby: There is never a right time. Just ask for it and get it over with.
Sales often asks if we can just leave it for the time being as the customer is “sensitive.” Yeah, probably, but is it the right thing to do? What about my “sensitivity?” No one ever asks about that. Yes, the previous company credit application will stand up in court, but at some point we will need an updated one. Wouldn’t it be better to just suck it up and ask for the application (this is rhetorical; credit managers already know the answer).
I had one sales rep tell me that this new credit application thing was bogus (not his real choice of words, but this is a PG magazine). He argued that when a mortgage company sells your mortgage to another mortgage company, the new one doesn’t ask you to reapply or update your information.
I must admit that stopped me in my tracks. I knew that rep pretty well. I am sure he had been crafting that response for some time. It took me a few moments to process and come up with the retort that while he was correct, we also didn’t have any real property to take back if the customer decided not to pay us. Leverage, my dear boy. It is all about leverage.
What it really boils down to, as with most things in the very gray area of credit, is what your company directive is. What can your company live with? How do you handle the customer and what is your approach? I have never been a fan of hard and fast policies and procedure, not fan of command and control approach; I am more of a free-range parent. Each customer and situation is different. I want to have the freedom to make adjustments and tailor the solution to what the situation is.
So, dear Pondering, there is no right or wrong, no rule of thumb, no holy grail of answers to rely on. It is whatever your company decides it can live with. If that doesn’t work, a few rounds of paper, scissors, rock with your CFO works too!
