Commercial Credit Application – What Information Is Really Necessary?

The first step in collecting a delinquent account is obtaining information about the debtor. The credit application is usually the best source for obtaining valuable information about the debtor and the assets of the debtor. If the necessary contractual formalities are in order (i.e. date, terms, signatures, etc.), the credit application can be an effective tool in commercial collections.

CREDIT VERIFICATION

Before credit is extended to any customer, steps should be taken to investigate the credit history of the applicant. The easiest way to accomplish this investigation is to have the applicant provide a number of references where credit has already been extended. Generally, between three and five references will be sufficient to verify the applicant’s credit worthiness.

To facilitate the investigation of the applicant’s credit history, including the credit history of the personal guarantor, the application should contain a statement that authorizes the creditor to verify the information included in the application, including contacting the applicant’s and personal guarantor=s references. For example:

The applicant and guarantors hereby authorizes XYZ, Inc. (the Creditor) to take appropriatemeasures in verifying the credit of (the business to which XYZ, Inc. is to extend credit) and releases XYZ, Inc. from any obligations and restrictions imposed by law while researching this information.

ASSET DISCLOSURE

The primary purpose of the credit application is to determine whether the applicant’s financial condition is stable enough to permit the creditor to risk an extension of credit. The application should state at the top of the form “The following statements and representations are made for purposes of procuring commercial creditfrom XYZ, Inc.” (the Creditor).

All credit applications should request information regarding the assets of the applicant. Specifically, the applicant should be required to disclose where all operating bank accounts are located. This information should include the name of the bank, branch office and the mailing address and telephone number of the office, account numbers, and the type of accounts (e.g. payroll, checking).

Depending on the type of applicant, you may wish to consider having the applicant disclose its major customers or location of its major accounts receivables. In the event that a judgment is obtained against the debtor, the accounts receivable of the debtor can be garnished or levied. While it is possible to obtain information regarding a debtor’s accounts receivable through a creditor’s supplemental examination, these accounts may be levied more expeditiously, and less expensively, if this information is disclosed on the credit application.

TERMS OF PAYMENT

The credit application should set forth the expected terms of payment. If interest or finance charges are to be charged on all accounts more than 30 days past due, this fact should be set out in the credit application. All invoices sent to the applicant should also contain information regarding interest and finance charges.

A provision permitting the collection of costs and attorneys fees incurred while pursuing collection of outstanding accounts should also be included in the credit application. Thus, the credit application should contain a statement such as the following:

In the event credit is extended, the applicant agrees to pay all costs and expenses (including actual and reasonable attorneys fees) incurred by creditor in collection of any outstanding accounts.

RESPONSIBILITY OF CUSTOMER TO PROVIDE UPDATED INFORMATION

There are times when a customer may complete a credit application and then the customer=s business structure (sole proprietorship, corporation, partnership, etc.) may change. For example, your customer maycomplete the application as a sole proprietor and then incorporate the business. Or your corporate customer completes the application and then the business is sold to new owners without any notice to you, the creditor.It is a good suggestion to include language in the credit application stating that the customer is obligated to notify you, the creditor, within 30 days of any change in the ownership or corporate formation of the business.

Choice of Law and Venue

Your credit application should stipulate under which State any law disputes shall be governed. For example, any dispute arising under this Agreement shall be governed by the laws of the State of AZ and that the customer agrees that any civil action may be brought in the County of AZ, the State of AZ unless otherwise required by the laws of the State of AZ.

Personal Guarantees

Personal guarantees often will make the difference in actually collecting the past due account compared to simply obtaining a judgment. Obtaining personal guarantees should coincide with your credit policy.However, the following language is suggested to protect yourcompany frompersonal guarantorswithdrawingtheir guarantees while purchases are either being made and/or pending orders are fulfilled.

“This guarantee may only be revoked by written notice to XYZ, Inc. (the Creditor) served via certified or registered mail, and any such revocation shall become effective 30-days after receipt of said written revocation. Any revocation does not revoke the obligation of the guarantor(s) to provide for prompt payment for indebtedness incurred prior to the effective date of the revocation, including the principal amount, interest, costs, and such reasonable attorneys fees as shall be incurred pursuant to this guarantee and under any contract evidencing the indebtedness guaranteed herein.”

SUMMARY

A credit application can provide valuable information if properly utilized. Not only can this information be used to verify an applicant’s credit history, but it can also be used to collect unpaid accounts. In addition, a well drafted credit application can do much more. By taking the time and effort to review and revise a creditor’s credit application, the odds of recovering delinquent accounts can be increased dramatically.

Contributed By:
James R. Vann
VANN & SHERIDAN, LLP
Attorneys at Law
1720 Hillsborough Street, Suite 200 (27605)
Post Office Box 2445
Raleigh, North Carolina 27602-2445
Telephone (919) 510-8585
Facsimile (919) 510-8570
www.vannattorneys.com

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