Credit Applications and Credit Sales-Part I

The economic slowdown and recession of the early 90's forced many businesses to re-evaluate their credit sales and the status of their accounts receivable. The prudent course of action should involve instituting pre-delinquency precautions and where necessary, exercising post delinquency remedies.

In this article, the focus will be pre-delinquency measures you can take to help increase the chances of post delinquency payment to you.

Every new or potential customer for sales on account should be reviewed for credit worthiness. A well written credit application can not only serve to assist this process but can also serve to define the terms of the agreement between the parties with respect to credit sales.

The application should identify the legal entity entering into the account as well as provide such other basic background information such as physical address, phone number, bank reference, and credit or trade references. Remember that under Pennsylvania law if the contracting party is a corporation, you will only be able to look to the corporation for payment, not the individual principals, absent an agreement to the contrary.

Upon receipt of the application be sure to follow up the credit or trade references provided. Check the history and longevity of the applicant as a measure of whether they will be around tomorrow to pay. Establish the length of their banking relationship with their current financial institution.

At any point in this review you may obtain candid information which merits further review or which will ultimately influence the maximum dollar amount of sales on account you may want to make to this customer. Remember, that in any sale on account, you are acting as "the bank" until paid, but unlike a bank you are an unsecured creditor with no collateral to look to upon default (and thus last in line for payment in any bankruptcy).

The credit application should also be tailored such that it becomes an agreement with respect to the credit terms upon approval. Here is your opportunity to define all relevant terms of the credit (i.e. net 30 days, late charge of 1.5% per month on unpaid balance over 30 days, etc.). Since, under Pennsylvania law, attorney's fees and costs are not collectable absent an agreement between the parties, consider adding language to the credit application providing the customer will pay fees and costs upon collection. Furthermore, you may want to consider language creating a personal guaranty by the principal or principals for credit extended to a corporate account.

By obtaining and reviewing a well written credit application you will not only be able to make an informed credit sales decision, but will also define key terms of your relationship with the customer and learn valuable information which will increase the probability of collection in the event of a default in payment terms.

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