If your business extends credit to customers or if you are considering starting to extend credit to your customers, there are a few simple things you can do help with your ability to collect the money owed to you on your credit accounts.
1) Get it in Writing. Ideally you will have every customer that seeks to purchase from you on credit fill out a Credit Application. In this credit application you can ask for information regarding the company or individual seeking to open a credit account. Ask for contact information, including addresses, telephone numbers, and email addresses. If the applicant is an individual, ask for a Social Security Number, if the applicant is a business, ask for a Federal Tax I.D. number. Ask for references, including references for other businesses for which they have credit accounts, bank references, and other businesses with which they do business. Asking for this information will enable you to make an informed decision when trying to evaluate whether to extend credit to a particular customer. In addition to asking for the customer to provide information, your Credit Application can set forth the terms on which you will be willing to extend the customer credit, should the application be approved. These terms can include sections for interest, late fees, attorneys’ fees, what constitutes default under the contract, what State’s law will apply to the contract, and other terms that will govern your extension of credit. Most importantly, make sure to have the application signed and dated by the customer seeking the extension of credit. If a business is applying for credit make sure the person signing the document lists their position at the business in order to show their authority to enter into contracts or apply for credit on behalf of that business.
2) Conduct a Credit Check. Use the information you obtain in the Credit Application to conduct a credit check of the applicant. Make sure that the terms of your credit application include language that authorizes you to conduct the credit check. By obtaining a credit report on the applicant you will be able to evaluate the creditworthiness of the customer and determine whether or not extending credit to them is a good idea.
3) Include a Provision for Attorneys’ Fees. An attorneys’ fee provision in your Credit Agreement or Application is vital in allowing you to recover any amounts that become delinquent. Unfortunately, the cost of collection can be high and if an attorneys’ fee provision is not included, any money you may recover may be depleted by the attorneys’ fees you may have to pay in order to collect the amounts owed. An attorneys’ fee provision will ensure that you not only can recover the principal amount owed, but also the costs of collecting the past due amount.
4) Require a Personal Guaranty. Particularly when you are extending credit to a business, including a personal guaranty is extremely beneficial. A personal guaranty provides that in the event the business fails to pay the debt, the debt will be paid by the personal guarantor. Often times businesses, especially small businesses, don’t have many assets on which to collect if the debt goes unpaid. However, a personal guaranty allows you to collect the debt from the guarantor’s assets as well. Make sure it is clear in the agreement that the person is signing a personal guarantee and that the guarantee is signed and dated by the guarantor.
5) Get Security. Sometimes you may be able to obtain a security interest in something owned by the customer. This security interest can be in anything from equipment to bank accounts and intellectual property to accounts receivable. Having a security interest in the customers assets provides leverage when you are seeking collection and also provides something from which payment can be obtained should the customer fail to make timely payment.
Deciding whether to extend credit to customers is an important decision that should not be taken lightly. Taking a few precautionary steps can mean the difference between collecting what you are owed and not getting paid. Applying these principals will assist you in your businesses’ credit management decisions.
The information contained in this article is meant for informational purposes only and should not be considered legal advice or services. It is always recommended to seek the advice of an experienced attorney when making business and legal decisions. No attorney-client relationship is established by the presentation of the information herein. Should you wish additional information about the topics discussed herein, please contact our office to set up an appointment to discuss your legal needs.