Effective Use of the Credit Application

JAMES M. LLOYD LLOYD & MCDANIEL, PLC 11405 PARK ROAD, STE. 200 P.O. BOX 23200 (502)625-9263 JAMES@LLOYDMC.COM

EFFECTIVE USE OF THE CREDIT APPLICATION

Without question, the credit application can be the creditor’s best friend. Many creditors will maintain that the particular circumstances of their business or industry, including increased competition, prevent them from successfully obtaining credit applications. Those creditors who successfully obtain credit applications will dramatically improve their delinquent recoveries and minimize delinquencies overall. There simply is no substitute for the credit application when it comes to providing important information about the account as well as establishing the terms and conditions which constitute the underlying contract between the parties. The credit application offers the creditor an opportunity to better assure legal leverage should a collection problem develop.

The credit application not only helps establish specific terms and conditions of the credit being extended, but also enables the creditor to accumulate important information about the debtor’s business which may be much harder, if not impossible to obtain once a full-blown collection problem should occur. It is amazing how many creditors extend credit in good faith without ever knowing the correct legal identity of the business to whom they are extending credit.

The credit application offers an excellent vehicle to determine the correct legal identity of the account, whether a proprietorship, partnership, corporation, or possibly limited liability company. If incorporated, the application should provide for the correct legal name. It would generally be a good idea to have the account reveal the state of incorporation, as well as to list any properly registered, or utilized trade styles or d/b/a’s. An indication as to how long the business has been actively engaged in business may be important information to know when making a decision on the initial extension of credit. Many businesses employ d/b/a’s or trade styles which may be very different from the correct legal name as listed on the corporate charter and in the records of the Secretary of State’s office.

Careful effort should be made to ensure that the correct legal name has been provided. Creditors will find that some accounts will have several different companies with very similar names, and in these type of instances, confusions are inevitable. In addition to the correct legal name, the credit application should include the corporation’s proper tax identification number.

If the business is a proprietorship, the full name and address of the proprietor, as well as the proprietor’s social security number, should be included on the credit application. If a partnership, the names, addresses, and social security numbers of all partners should be provided. In the case of a proprietorship or partnership, preferably the home addresses of the owners should be provided in the event that the business should close and efforts need to be maintained to locate the former owners.

The credit application should include trade references, as well as banking information. The credit application should include specific language authorizing the references, especially the bank, to be contacted for further verification of the information provided, as well as to inquire further about the creditworthiness of the applicant. Creditors will find banks in particular extremely uncooperative unless the bank can be provided a copy of the authorization to release information.

Terms of payment

This clause enables the creditor to set forth the specific terms of payment so there is no confusion when the payments are due. Specify that payments are due at the sellers location to further build on the fact that the contract is being partially performed at the seller’s location, which again helps support a jurisdictional argument for the seller’s home county for venue purposes. Reference can be made to the fact that invoices are due in accordance with the terms stated on the face of the invoice such as 30 days from receipt to establish a specific due date after which service charges will accrue. Service charges should be specifically set forth with an agreed upon rate. Language prohibiting unauthorized discounts, credits or returns is a good idea. Reference can be made to the fact that the seller has the right in its discretion to apply payments to the oldest unpaid invoices. In some cases this may support the seller’s attempts to preserver mechanics lien rights. Reservation of rights such as stoppage in transit, right of reclamation and the right to adequate assurance of performance, can be addressed as further support that these remedies have been contractually agreed to between the parties. These clauses can also incorporate language negating or limiting any express or implied warranties, or these items can be provided for in a specific clause relating to warranties. Depending on the industry, to attempt to set reasonable limits for inspection of the specific goods. Delinquent customers will frequently attempt to create disputes or defenses with belated claims of shortages, or allegations that the goods did not meet specifications or were otherwise non-conforming. While the Uniform Commercial Code would provide that between merchants goods not rejected within a reasonable time frame are accepted, it behooves the seller to have a contractual provision to avoid disputed issues of fact that may require adjudication before a judge or jury. Finally, it is suggested to require claims, offsets or any disputes to be submitted in writing by the customer within some reasonable time (such as 10 days) that a dispute becomes apparent. Once again the idea is to limit belated attempted to justify non-payment when the real problem is cash related.

A specific agreement for payment of interest or service charges

Generally, service or other interest charges are recoverable on a liquidated amount of money from the date due, at the legal rate of interest prescribed by the state where the debtor is located. In most states there is a legal rate of interest, and in the absence of a specific agreement a creditor can ask for the legal rate. However, it is generally not a good idea to rely upon the legal rate of interest, as many courts seem unwilling to award any interest on a liquidated account in the absence of a written agreement to pay these type of charges. Accordingly, the credit application is an excellent place to provide a specific term for payment of specific interest charges. Interest charges of 1.5% to 2% per month seem to be fairly typical and are generally charged from the date due.

Agreements to pay attorney’s fees/collection fees in the event of default of payment

Collection charges and attorney’s fees are not enforceable in most states, unless there is a specific

agreement to pay for these charges. These types of clauses have become standard fare in virtually all credit

applications. Generally, a court will only enforce what it considers to be reasonable collection charges

and/or attorney’s fees and will not always mirror the actual charges that the creditor may have agreed to pay

its collection agency or attorney. The effective use of these type of clauses will, however, provide the

creditor with additional leverage and may well enable the creditor to enforce collection in-house, without

placing the matter with an agency or an attorney by simply having this type of clause in the credit application

agreement. A suggested clause may read as follows:

It is agreed and understood that in the event of default, which shall include but not be limited to the failure to pay outstanding invoices in accordance with the terms set forth thereon, that applicant shall pay all costs of collection, including attorney’s fees in an amount equal to 25% of the

outstanding balance, which the applicant agrees is reasonable, whether or

not suit is filed.

No unauthorized deductions, credits, or returns without prior authorization

The important point here is to ensure that an account in arrears simply does not attempt to return

goods without authorization or simply takes deductions against an outstanding balance for alleged credits

for defects, late deliveries, etc. The credit application agreement should provide in no uncertain terms that

no deductions, credits or offsets are allowed without prior written authorization by the creditor. Equally

important should be a statement to the effect that no returns of merchandise will be authorized or accepted

without the prior written consent and/or issuance of an RGA (return goods authorization) of the creditor.

This type of clause may not prevent an account from attempting to take unauthorized deductions for credits

and may not dissuade an unhappy customer from simply shipping merchandise back to the creditor.

However, this type of clause may provide important leverage in court when it comes time to enforce the

obligation.

Jurisdiction and venue

Subject to the specific laws of each state and its respective jurisdictional statutes and any limits, as well as normal due process considerations, it is always desired to attempt to preserve jurisdiction and venue in the creditor’s home state and county. These types of clauses will grant the creditor the additional leverage of being able to sue in its home county thus reducing the odds of having to deal with spurious disputes and defenses, and having to litigate an account long distance in the account debtor’s home court.

Limitation of Warranties

This clause it intended to protect the seller from any express or implied warranties that the seller may

wish to avoid. Depending on the circumstances seller may be unable to limit express warranties and thus

may only wish to attempt to avoid implied warranties such as fitness for particular purpose, and any alleged damages for consequential or incidental damages.

Change of ownership or character of business clause

Many times an account may be opened as a proprietorship and later incorporate. The law is clear

that when this occurs, unless the account has made some effort to conceal the fact that it is incorporated,

that the mere incorporation of the business is a matter of public record and, accordingly, the creditors of the

business are on constructive notice of the fact that the business is now incorporated. There may be very

subtle cues when this process occurs, such as a slight change in the name of the business on its checks or

other innocuous changes relating to the manner in which business is being conducted. To help protect

against instances where substantive changes in the ownership or nature of the business should occur without

the creditor’s knowledge, this type of clause should be utilized to affirmatively require the account to provide

notice of any substantive changes in ownership or the nature of the business. A suggested clause is as

follows: It is understood and agreed that credit is being extended to the applicant based upon the information provided in this application, and based upon the creditworthiness of the current ownership. In the event any changes in the ownership or character of the business should occur, applicant agrees to provide notice of any changes by certified mail, return receipt requested to the creditor. Examples of change in ownership shall be deemed to include but not be limited to the following: (i) a proprietorship or partnership subsequently incorporating; (ii) a partnership that is dissolved or which adds or reduces any partners listed herein; (iii) the sale of a proprietorship or partnership interest; or (iv) the dissolution or revocation of a corporate charter in the event that Customer is an incorporated entity.

Change of Address, Billing Inquiries, and Disputes

It is a good idea to include a clause which requires the customer to affirmatively notify the seller of any change of address which could signify problems. In addition it is a good idea to require that any billing inquiries and particularly any disputes be submitted to the seller in writing within 10 days of receipt. This should help reduce belated efforts by a customer to raise spurious disputes in an effort to avoid or delay in making payment.

Sales Tax

Many times a customer will attempt to belatedly claim they are being improperly charged sales taxes on sales which the customer maintains are tax exempt. It may be appropriate depending on the industry to include a clause which specifically requires the customer to submit proof of exempt status. Suggested language would include a requirement that the customer provide a tax exemption certificate on the front end to avoid confusions and needless disputes during the billing process.

Waiver of Jury Trial

It has been the experience of the author that jury trials traditionally favor the debtor. In addition a request for a jury trial generally means a significant time delay in getting a case before the court for trial, not to mention the fact that a jury trial can more than double the time required to actual try the case. Accordingly it is suggested that the credit application include language wherein the customer agrees to waive any right to trial by jury.

Severability

The purpose of this clause is simply to preserve and protect the remainder of the agreement should a court construe any other term unenforceable for any reason. This is a standard clause seen in many form contracts.

Merger Clause

The credit application should include a clause that establishes that the terms and conditions, together with sellers invoices, statements and sales confirmations represent the entire agreement between the parties. This further protects the seller against additional terms and conditions contained on a customers purchase orders that may negate the terms and conditions established by the seller. These types of clauses are also intended to negate prior verbal agreements between the parties to avoid confusion as to the terms over which the parties finally agreed.