Credit Application Terms

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Home >> Credit & Collections Best Practices Summary

The credit application is perhaps the only document that a credit department will persuade a customer to sign (if they want a line of credit), thereby turning it into a legal document; therefore, modify it to enhance the company’s ability to collect overdue receivables. Consider including the following clauses:

ACH debit clause. 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 billing, and leave space for the customer to enter bank account information.
Arbitration clause. The steps followed in the arbitration process are similar to those used in normal legal proceedings, but they follow a more compressed timeline, with judgment being rendered by an arbitrator. The clause should specify which issues will be subject to arbitration, and the steps both parties will follow during the process. Keeping the arbitration clause as specific as possible will keep the two parties from wrangling over how the arbitration is to be conducted.
Credit venue provision. If a customer defaults on a payment, the company will want to litigate the case as close to home as possible in order to avoid travel costs. This can be achieved by inserting a clause that any recourse to the courts will be settled in the company’s state of residence.
Duty to inspect. A customer may claim well after the date of receipt that a delivery was damaged, and use this as the basis for non-payment. To sidestep this issue, insert a clause requiring the customer to inspect received goods and issue a complaint to the company within a specific period of time, after which the customer waives any further claims.
Security interest provision. This clause gives the company a security interest in any goods shipped to the customer. If used, the company needs a procedure for perfecting any security interests received; this is time sensitive, because the first security interest publicly filed has priority over later claims.
Personal guarantee. Company owners frequently have more assets than their companies, so obtaining a personal guarantee is certainly worth a try.
Reimbursement for collection fees. The collection department may resort to the use of a collection agency or attorney to collect a past-due account. By having the customer agree in advance to reimburse the company for these added expenses, it may be possible to use the threat of this clause to accelerate customer payment.
Reimbursement for NSF fees. If a customer pays with a check that does not clear because there are not sufficient funds (NSF) in the account, the company will be charged a fee by the bank. The customer should agree to reimburse the company for this charge. Better yet, include a standard fee in the credit application that is even higher than the bank’s fee, so the company is also compensated for its transaction handling costs.
Charge for duplicate invoices. If customers continually ask for a duplicate of an invoice that was already sent, this is a likely sign of a payment delaying tactic. If there is a clause in the agreement that specifies a modest fee for supplying additional copies, the collections staff can trigger it if they suspect a customer is abusing the service.
Signature is binding. A customer could claim that the person signing the credit application is not an officer of the company, and that the agreement is therefore not binding. To avoid this, include a clause stating that the person executing the agreement acknowledges that he/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, 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.

If the security interest or personal guarantee provisions are signed, the credit application becomes a valuable legal document, so make sure that a procedure is in place to appropriately store the application.