Credit Applications or Agreements Reduce Risk

One of the smartest moves a business can make when extending credit is to have a comprehensive credit application, or agreement. In fact, many credit savvy companies have several variants of their credit application, or agreement, to cover different situations and reduce risk. In addition, every industry and company has its own unique customer credit logistics.

When dealing with large balance receivables, it is wise to have options at your fingertips that reduce your risk. For example: A new limited company with a limited credit history applies for a credit line. The failure rate for new companies is high. In a case like this a prudent move may be to insist on a personal guarantee from one, or all, of the directors. This way if the limited company goes under, your odds of a potential bad debt write off are sharply reduced.

Directors of a company are well aware when their company is going out of business. As their business deteriorates they go into survival mode. In reality, this means their main concern credit wise is to pay the secured creditors and creditors they have guaranteed personally. As far as paying other creditors, they resort to stall tactics. Basically they want to avoid paying the other creditors and their goal is to stall out payment until they close their doors.

There are numerous terms and conditions that can be incorporated into, or with, a credit agreement that will substantially reduce your risks of a customer bad debt. An Indemnity Agreement for example, is similar to a personal guarantee and makes the owner(s) personally liable should their company default on payment.

There are many variants of credit agreements, such as conditional sales contracts, collateral agreements, mortgages, security agreements, debentures and the list goes on. Using agreements will also increase sales, as some restrictive terms can turn an extremely risky deal into a win-win situation.

Trust but Verify

The main objective of credit agreements is to better secure your position in the event a customer becomes delinquent, or goes out of business. However, whatever information a potential credit customer may tell you it pays to verify if what you are being told is accurate.

Some companies don't realize that you cannot pull a Transunion or Equifax credit report unless your customer has given written consent. This is why having a credit waiver in a credit agreement is so important. A consumer or commercial credit report will help verify or disprove the information your potential credit customer has provided to you.

Here are a couple of sample credit waiver clauses for a British Columbia credit agreement:

The undersigned hereby authorizes XYZ COMPANY or his agents to obtain personal and corporate information from credit reporting agencies, banks or organizations and authorizes those agencies, banks and organizations to disclose to XYZ COMPANY that may be necessary in establishing credit. This consent is given under Section 3 of the Consumer Protection Act, SBC 2004, c 2.

XYZ Company is authorized to obtain such credit reports or other information, as may be deemed necessary in connection with the establishment and maintenance of a credit account, or for any other direct business requirement.

Another benefit of a credit waiver is when a credit customer starts to go sideways. The waiver allows you to pull a credit report and get a financial snapshot of where your customer is at. Comparing a current credit report to the original credit report when they applied for credit usually reveals where your credit customer is headed.

Out of Province Credit Customers

One big mistake some companies make when extending credit to out of province customers is to use a "one size fits all" agreement. Laws and court systems vary from province to province and often terms that can be enforced in one province cannot be enforced in another.

If you are extending substantial credit to companies in other provinces, it pays to have agreements that are tailored to the specific province where the customer resides. For example: In some provinces you can pursue the cost of collection providing the customer has agreed in writing, whereas in some provinces you cannot.

Agreements and Risk Management

The logistics of creating an effective credit agreement-application varies from industry to industry and company to company. Every business is unique, which affects the terms and conditions a company needs to reduce risk.

If you are creating your own credit agreement after extensive research it is advisable to have the agreement reviewed by a lawyer in case you missed something. IRS offers credit application, or agreement services that are reviewed and approved by a lawyer. Ask your IRS rep for more information or schedule a free consultation.