How Credit Applications Protect Utah Suppliers

If you need help or would like to speak with an experienced attorney, please call (801) 365-1030 or click here to contact us.

Most Utah suppliers provide equipment, materials, supplies, and other goods to general contractors, subcontractors, and sometimes other suppliers on an ongoing basis. Depending on the nature of the business relationship, each purchase from the supplier might be made in one of many different ways— ranging from an email request, a telephone conversation, or an online order. Many times, the purchaser in these transactions takes the goods on credit, and the supplier later invoices the purchaser for the goods. Often times, the supplier gets paid once this purchaser gets paid, and this working business relationship is generally beneficial to both parties.

However, if the supplier’s purchaser runs into hard times and chooses not to pay the supplier, does not have the ability to pay the supplier, or for some other reason decides to stiff the supplier, the parties’ prior business relationship—no matter how good it was—may not help the supplier get paid. This post discusses the importance of vetting customers before a supplier enters an ongoing relationship to provide goods or supplies to a customer on credit, as well as the importance of putting into writing at the outset the terms of the parties’ ongoing contractual relationship. This initial contractual agreement is often referred to as a “credit application.”

This post does not address liens and how a supplier can preserve its lien rights, which is another layer of protection to ensure payment for goods or supplies the supplier provides for a construction project.

Bank and Trade References

Often, a credit application requires potential customers to provide bank and trade references and other related information. This information allows the supplier to understand the potential customer’s ability to repay the supplier. The credit application might also authorize the supplier to receive certain helpful information from banks and other companies upon request—such as account information from banks—so that the supplier can better evaluate the ability of the potential customer to repay the supplier. Wisely, the supplier might not want to rely solely on what the potential customer claims in the credit application but rather do its own investigation. Depending on what type of business the supplier and customer are involved in, a credit application might request or seek authorization to obtain many different types of information. If satisfied that the background check supports a low-risk and healthy business relationship, the supplier might choose to accept the credit application and begin providing goods on credit to the new customer.

Personal Guarantee

If the supplier is not satisfied with the potential customer’s ability to pay, or if the supplier sees red flags while doing its due diligence, the supplier might wisely decline the credit application. Instead, the supplier may require an owner or principal of the potential customer to sign a personal guarantee as an added protection. (Some suppliers require a personal guarantee regardless of how robust the potential customer appears.) A personal guarantee is an agreement by an individual to be held personally responsible for any debts or obligations that the potential customer company might incur or fail to fulfill. If the customer (usually a business entity) goes out of business or files for bankruptcy, the personal guarantor (an individual) is still on the hook. For example, if a president of a corporation signs a personal guarantee, and the corporation takes $100,000 of materials from the supplier but does not pay before filing for bankruptcy, the supplier is not entirely out of luck. The president will be personally liable for this $100,000 and any other penalties set forth in the credit application associated with late payments or non-payment. Even though the corporation is no longer a viable source for repayment, the supplier has an alternate source from which to recover all outstanding payments.

Credit Terms

Once the parties start doing business, it is unlikely that they will sign a document that contains many terms that will be helpful to the supplier if the customer does not pay. The customer might order materials by phone or by email, and in the normal course of business, the parties will have little time or desire to discuss (or rehash) the credit terms. As a practical matter, business usually moves too quickly to discuss the specific terms of each transaction. These potential terms, which should be set forth in a credit application before the parties begin doing business, include interest rates and late fees that will apply if invoices are not paid on time, attorney fee and costs if the supplier needs to resort to collection efforts, and other terms that will help protect the supplier from additional loss. Each invoice and transaction between the parties under the ongoing relationship, including those entered orally, will be governed by the terms of the written credit application.

Other Contract Terms

There may be other contractual terms that the supplier wants to include in the ongoing contractual relationship, which will also be impossible or impracticable to incorporate into each separate transaction. For instance, the supplier may want to exclude all warranties on the goods sold to the customer (possible under Utah law), or the supplier may want to set forth certain dispute resolution procedures should there be a conflict related to a future transaction (i.e. requiring a meditation before a lawsuit is filed or requiring arbitration). Just as is the case with credit terms, the best time to reach an agreement on these and any other terms is before the parties begin doing business, not after there is a problem related to a future transaction. These terms should be in the initial contract that governs the relationship, which is usually the credit application.

Assistance with Credit Applications

Benjamin Franklin is credited with saying: “An ounce of prevention is worth a pound of cure.” Wise suppliers take this to heart and do not jump into contractual relationships with customers before ensuring that the customer is not an overly risky client and that the terms of the ongoing contractual relationship are set forth in a writing. If your business is looking for assistance with a credit application or other contract document with an ongoing client or customer, give us a call. We would love to help your business protect its interests. 

Skoubye, Nielson, Johansen Attorneys Salt Lake City Utah

If you need help or would like to speak with an experienced attorney, please call (801) 365-1030 or click here to contact us.