Credit application terms

The credit application can be considered a legal document, since it may be signed by the applicant. If customers can be persuaded to sign the application, then consider adding a number of clauses to the document to give the company several legal rights. For example:

  • Arbitration. Both parties agree to arbitration of any payment disputes. By doing so, the more expensive approach of litigation is avoided. Include in the clause the exact arbitration steps to be followed, so there are no delays associated with later negotiation of these steps.

  • Binding signature. The applicant could claim that the person signing the application does not have the authority to do so. A clause could state that the person signing the application does have the authority to agree to the terms and conditions stated in the application.

  • Electronic payment. The customer will pay the company by having the company automatically debit its bank account with an ACH debit transaction for invoiced sales, as of a certain number of days after the invoice date, or as of a certain day in each month.

  • Fee reimbursement. If the company needs to pay a third party, such as a collection agency or attorney, to collect from the applicant, the applicant agrees to pay these fees. It is not likely that the fees will actually be collected, but it may be worthwhile to insert the clause just to provide the company with extra collection leverage.

  • Inspection. The customer agrees to inspect goods from the company upon their arrival and issue a complaint about any problems found within a specific period of time. After that time period has expired, the customer revokes the right to continue to claim product damage. This clause reduces the number of options that a customer has for delaying payment.

  • Legal venue. The parties agree that, if a legal outcome is necessary, the litigation will be addressed in the state of residence of the company, not the applicant. This reduces the cost of travel for the company.

  • Personal guarantee. The person signing the application agrees to personally guarantee the debts owed by the applicant. This clause is the most frequently objected to by applicants, but is worth attempting in order to establish a legal claim.

  • Returned check fees. If the applicant pays the company with a check for which there are not sufficient funds, the company is entitled to charge applicant the amount of the associated bank charges. This results in a minor expense reduction for the company, but can be useful for convincing customers to pay attention to the amount of available cash in their checking accounts.

  • Security interest. The applicant grants the customer a security interest in any goods sold to the customer. Assuming the company follows up on this right by filing the appropriate paperwork, it will then have a right to those goods that has priority over the claims of unsecured creditors.

It is likely that a large number of additional clauses will spill over to the back side of the credit application. If so, include extra lines on the back for signatures or initials. Having these lines filled out provides legal evidence that the applicant has read and agreed to the additional provisions.

Related Courses

Credit and Collection Guidebook 
Effective Collections