Monday 4 November 2013

10 Clauses You Should Include On Credit Application Terms

A credit application is the only document that safeguards a company from the risk of bad debt.

While small businesses are often not backed with credit agreement—thus imposed to the risk of having bad debt—at all, medium companies probably have credit application on place but the terms of agreement include loopholes that customers can exploit to delay or even avoid payments. Many of them adopt credit application template they copy from the internet or purchased one through stationary store nearby the office.

As a result, many small companies closed their business after having failures in collecting receivables from customers and many medium businesses have also fallen into financial difficulties for the same reason.

If you provide customer with line of credit, but not sure what to include on the credit application terms, you may want observe and learn 10 clauses I am explaining on next.



1. Include “Automated Clearing House debit” clause


A prudent credit application term should include a clause stating that the customer agrees to have the company debit its bank account for open accounts receivable as of a specific number of days following the invoice/bill, depends on the credit length—for example: 2 or 7 or 14 or 30 days. Do not forget to leave space for the customer to enter bank account details, though.

By doing so, you have the right to debit customers’ bank account right away for any receivables due on that day. This will eliminate the chance of getting late payment from the customers.



2. Include “duty to inspection and limit complain period” clause


Let’s be honest that low quality merchandise could accidently slip into the package and shipped out to the customers but, in other side, let’s also be more realistic that customer may intentionally claim to receipt damaged products and use this as the basis for postponement in payment or even nonpayment at all.

To prevent such risk, you may want to include a clause requiring the customer to inspect received goods and issue a complaint to the company in within a specific period of time, after which you have the right to refuse any further claims.



3. Include “personal guarantee” clause


A limited company is by the law responsible on settling its liabilities only as much as the assets they have. It means that your chance to unpaid is open. While on other hand, we know company owners sometimes have more (personal) assets than their companies.

Including “personal guarantee clause”, on the credit application, could ensure you will get paid even if the asset of customer’s company is not enough to settle or its liabilities.



4. Include “security interest provision” clause


Including “security interest provision” clause on the application is another good way to minimize the risk of getting late payment and unpaid; it gives you a security interest in any goods shipped to the customer.

Those who want to include the clause, however, would needs a procedure for making sure the security interest is filed on timely manner. This is time sensitive, because the first security interest publicly filed has priority over later claims.



5. Include “reimbursement for collection fees” clause


Your collection department probably needs the use of a collection agency to collect a past-due account and this is an extra carrying cost. You don’t want this extra cost will increase your lost on late payments.

To completely prevent the risk, you want to include “reimbursement for collection fees” clause on the credit application term. By having customers agree in advance to reimburse the company for the collection fee, it may also be possible for you to remind customers about the important of paying the invoice on time or accelerate a late payment by using the clause as a threat.



6. Include “reimbursement for NSF fees” clause


‘Not sufficient funds’ (NSF) is a common reason for customer’s failure on paying your receivables, particularly on check payment.

With “reimbursement for NSF fees” clause on the credit application term, you will charge the customers for any unclear checks because of NSF on their bank account. The customer should agree to reimburse the company for this charge. Better yet, if you include a standard fee in the credit application that is higher than the bank’s fee, thus you’re also compensated for the transaction-handling costs.



7. Include “charge for duplicate invoices” clause


When a customer starting to ask for a duplicate invoice that was already sent, repeatedly, it could be a sign of a tactic to delay payments. So you want to prevent this by including “charge for duplicate invoices” clause on the credit application term.

Also, by specifying a modest fee for supplying additional copies, the collections staff can trigger it if the staff suspects a customer is abusing the service.



8. Include “credit venue provision” clause


There are certain cases where receivables can only be settled after litigation process in the court. Even single trial court can be back-and- forth, thus costly in term of time and money, at least travel cost.

With that in mind, it is always good to keep such cost as low as possible. This can be achieved by choosing a court as close to home as possible. Therefore, insert a clause that any recourse to the courts will be settled in the company’s state of residence.



9. Include “arbitration” clause


A long standing dispute between seller and buyer likely goes to an arbitration process. The arbitration itself is available, in the consent of both parties, as a quick route to resolution.

The often obstacle that could prolong the process, however, is that parties in dispute aren’t sure about how the arbitration is to be conducted. To sidestep this issue, you want to include a clause to specify which issues will be subject to arbitration, and the steps both parties will follow during the process.

The clause on the agreement will allow both parties to shorten the period before achieving final resolution, and the arbitration process therefore can be followed in more effectively manner.



10. Include “signature is binding” clause


Bad debtor is bad. So bad that it could even pretend to sign any agreement with you. Such practice maybe carried by claiming that the person signing the credit application is not an officer of the company, and that the agreement is therefore not binding.

To avoid such denial, include a clause stating that the person executing the agreement acknowledges that he or she has the authority to enter into the terms and conditions of the credit application.

If any provision is listed on the back of the credit application or on any page other than the signature page, make sure customers also include an extra signature or initials line on that page of the application, thereby giving legal proof that the customer has acknowledged and agreed to the provision.

Of course you can’t force any customers to agree with every single clause you put on the credit application document. Not only refusing the clause, they even have the right to not doing business with vendors that do not meet their expectation.

Trading is always a trade-off. In this case, you are trading the “business risk” off the “customer satisfaction.”

If you don’t have the authority to decide whether to keep the credit term tight in the cost of customer satisfaction, the safest for you is by allowing a customer—who in objection—to cross out any non-agreeable clauses and put his or her initials next to the alteration. It is then up to your manager to proceed with the application in light of those alterations or to reject the application.

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