Credit applications act as a background check for businesses to determine the level of risk giving an advance to a customer might pose. If a business provides a customer with a product before performing a credit check or receiving payment, then they expose themselves to the possibility of severe interruptions to their cash flow if the customer breaks their agreement.
A business credit application can make it easy to collect all the information you need to properly gauge the risk a specific customer poses. It can also help you determine how much credit is appropriate at that time.
While granting a line of credit for a business-to-business (B2B) relationship is similar to business-to-consumer (B2C), what they’re looking for differs. Typically, when a consumer needs to buy something on credit, it’s for a single item that is slightly more costly than their typical expenses, like jewelry or workout equipment. Since B2C credit transactions are typically non-recurring for a high volume of customers, it makes sense to have a bank handle the requests.
Applying for business credit from a vendor is often done with the intention of building a long-term professional relationship. The customer often intends to use what they purchased on credit to help them make their own sale. They then use the profits from the sale to pay off the advanced credit. These purchases can quickly accrue to be worth hundreds of thousands of dollars. The stakes are much higher than B2C and, as a result, the credit check is more complicated.
There are two approaches a business can take when approving business credit applications: secured and unsecured. A secured line of credit requires the customer to put up an asset as collateral. If the customer fails to honor the agreement, the vendor can seize the asset in lieu of payment.
An unsecured line of credit (ULOC) requires no form of collateral and is based on the customer’s credit history. If they are seen as low risk, then they are more likely to be approved for an unsecured line of credit. This is usually determined by the industry the business operates in and their own internal policies.
