Having represented many creditors over my many years of practice I can tell you that many business owners are reluctant to run credit applications for trade credit. The main reason in almost every case is based upon the illogical fear of losing a potential sale. While sales are certainly important, getting paid for your work and/or materials is just as important. As well, a comprehensive credit application can help more of your business achieve both objectives.
1. If you decide to undertake this process have a system in place. Having an effective credit application is but a first step in a larger credit process. In counseling many businesses, I have found that many have a good credit application but do not have a supporting system in place to check out the truth and accuracy of the information obtained. What good does it do to have a credit application if you do not have the means to verify the information provided? Depending on the size of your business, this effort can be undertaken by your company's comptroller or, in some cases, some of my clients have sent the information to outside firms for verification. In these cases, you must inform the prospective applicant that you may have their application reviewed by a third-party provider and make sure to get their permission in advance. Many times, whether you utilize an internal system or external system, the information you receive will give you some definitive answers as to whether going forward with any new or existing customer makes sense for your company. There are also outside credit data firms such as Dun and Bradstreet which require a subscription to assist with providing background credit information.
2. Make sure you have language in the credit application that allows you to deny maintaining or extending credit if the customer's credit is not satisfactory. As I indicated in my last article, the credit application is your way of controlling the process. You should create a document that allows you to control the process even after the credit application is completed and has gone through your internal or external system. Having said this, make sure that your application permits you, at all times, and without any prior approval of the applicant to deny any request for extension of credit or, moreover, if you find that the customer's financial situation has changed to allow you to either reduce or eliminate credit depending on the circumstances. It is your company and your materials or services that are being extended and that should be kept in mind at all times. Quite often, consent to get credit information or to deny or limit credit information is contained in an addendum to the credit application itself.
3. Make sure that the applicant to the corporate or business credit application both signs and prints his name. In many instances, businesses only require a signature. Many times, however, the signature that is provided is not legible. Many people, present company included, have lousy handwriting. In order to fully protect yourself on this part of the credit application process, you must obtain a signature but also make sure that the title of the individual is specified. Most importantly, make sure that the person signing the document also prints his name below. This additional information will help you avoid the argument, in most cases, that the person signing the document actually signed the document.
4.Depending on what your business is extending credit include terms and provisions. Credit applications should not be more than one page as a general rule. In some situations, however, businesses may want to include certain terms and provisions in the application that are important to the kind of services or product provided. In this case, a business should free to utilize the back of credit application for such terms and provisions. To this end, the credit application is still technically one page but your business has maximized the one-page limit by using both sides. In a separate article, I will address those specific terms and provisions that need to be included as part of your application.
5. It is imperative to include a guarantee in the application. On the second side after the terms and conditions, your company must include any and all guarantees that may be required in order to extend credit. If this is the case, make sure that you leave sufficient room for the guarantee to appear on the second page and to include the necessary language to make the guarantee fully and independently enforceable. Many clients are now running separate credit checks on guarantors particularly when a new credit-customer relationship is being established.
6. Make sure you comply with the Equal Opportunity Credit Act. This federal law became mandatory for business creditors in April of 1990. If you happen to deny credit either at the beginning of a customer relationship or during that same relationship it is imperative to comply with the terms of the act.
The credit application and credit application process can be complicated. Once you have a credit system in place, however, the process will become more easy to manage. At the Katz Law Group, we have helped businesses throughout the entire credit application process. We know what it takes to protect your company's business and legal interests. Please feel free to call us at 508-480-8202.