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 course of action should involve instituting pre-delinquency precautions and 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.
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. It 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. It also provides such other basic background information such as physical address, bank reference, and credit or trade references, etc.. Under Pennsylvania law, if the contracting party is a corporation, you will only be able to look to the them for payment absent an agreement.
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. Unlike a bank, you are an unsecured creditor with no collateral to look to upon default. This puts you last in line for payment in any bankruptcy.
The Application
You should tailor your application 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. This applies to net 30 days, late charge of 1.5% per month on unpaid balance over 30 days, etc.. Under Pennsylvania law, attorney’s fees and costs are not collectible absent an agreement between the parties. Because of this, 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 be able to make an informed credit sales decision. You 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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