The Commercial Credit Application Health Check – The 8 Must Haves
Learn about a Customer Credit Application, what it involves and why it is important.
Credit Managers and Financial Controllers that offer commercial credit to small-to-medium enterprises (SMEs) are exposed to significant credit risk. they need to make sure their contractual documentation provides an appropriate level of protection for the industry risk they face. The first step towards improving results in B2B debt recovery claims is to review your business’s
Commercial Credit application
Why is your customer credit application important?
The simple answer is that it is the contractual document that establishes your legal relationship with customers. Lawyers understand that your customer contract includes not only the customer credit application, quotes and purchase orders, but potentially also conversations and emails with your customers.the key issue for Credit Managers is to recognise that the written contract documents should be clear and consistent to avoid arguments at a later stage. If a customer wants to dispute an account, their lawyer will start off by reviewing your contract documentation. Your contract documentation includes:
Customer credit application
- Customer quotes
- Purchase orders
- Terms of trade
- Credit notes
- Emails to the customer containing representations or agreements
If there is a legal dispute a Court may undertake an exercise of interpreting this contract documentation, and if there are inconsistencies in your contract documents your chances of recovering the whole account may be reduced.
1. applicant name to be clearly identified with an ABN
If your customer credit application doesn’t identify the debtor properly, such as their legal name and Australian Business Number (ABN) you may discover that their trading name, i.e. ABC Supplies, isn’t registered.
2. A personal guarantee for all directors and proprietors of the debtor
If you are dealing with a small private company (i.e. the proverbial $2 company), it is reasonable to require the directors of that company to provide a personal guarantee for all debts incurred. This may protect you against the ‘phoenix company’ – the situation of a company loaded with debts and then strategically abandoned by its directors.
3. Purchase Money Security Interests (PMSI)
You may want to have the right to reclaim goods supplied to the customer who then defaults on payment. alternatively, you may want to require a liquidator appointed over the customer to pay for those goods rather than assign you to the category of ‘unsecured creditor’. The best protection is to have a PMSI clause and register the interest on the Personal Property Securities Register.
4. Incorporation of standard terms and conditions
Each industry has a set of standard terms and conditions for the supply of goods and services. these should be incorporated (i.e. attached and specifically referred to) into the commercial credit application.
5. Cost indemnity
Debt recovery costs such as mercantile agents and solicitors add value but are not cheap. If your credit application does not provide the right to recover all collection and legal costs, you may not have a right to recover all these costs from customers that delay payment. Your customer credit application should include indemnity for debt collection and legal costs.
There is a right to claim interest if you file a claim with a Court, but if the debt is paid before legal proceedings commence you will want the right to claim interest upon default. Your customer credit application should provide that if the customer defaults in the agreed trading terms (e.g. 30 days net), you will be entitled to charge interest each calendar month on all overdue amounts until the date of payment.
7. Privacy disclosure so that you can implement credit checks
If you want to undertake credit checks into customers or to report payment defaults, your customer credit application needs to obtain the consent of the customer.
8. Exclusive jurisdiction clause
If you are forced to take action against a customer based in another state you don’t want to have to face proceedings in that state. Your customer credit application should include an agreement that the parties submit to the exclusive jurisdiction of the Courts in your home state.
Author: Sewell & Kettle Lawyers
Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.