Does your credit application and terms of trade work when it has to?

In times like these, every business dollar has to count and the loss of any cash out the back door by way unpaid accounts places needless pressure on the business cash flow. The provision of credit remains the foundation of the `Money Go Round’ for New Zealand businesses, enabling one entity to do business with another while providing goods and services on a basis of trust,  but those goods and services must still be paid for within an agreed time frame if the business is to survive. 

In a perfect world it’s a great arrangement – that is, until the unscrupulous take advantage and break the rules forcing the business to protect its income by minimising its exposure. To protect itself, a business must actively take steps to mitigate loss or potential future losses caused by customers who do not pay on time or in some instances not at all.

In my capacity as Managing Director of DebtForce Limited, I see a great many companies spending thousands of dollars on loss prevention methods at the front of their business but fail to see what is slipping out the back door when the credit application and terms of trade are ignored. 

Indeed, It never ceases to amaze me how overlooked the importance of the Credit Application is and how businesses are all too often prepared to spend more on other documentation instead. As a result, businesses are often left open to exploitation due to deficiencies in the document, or when there is no document at all.

There are a number of professional debtors who are experts at exploiting the weaknesses of a company’s credit agreements and its credit approval processes which often allow the debtor to walk away from overdue accounts. Unfortunately, in such cases, the law does not view such matters in the same light as shop theft, for instance, though in my opinion, it is much the same.

A credible credit application and terms of trade document should always be the critical starting point to covering that back door risk and a well designed document can afford good protection and suitable remedies when required when managed correctly. The receiving of the signed credit application is only the first step in the credit approval process, before the formal information vetting of the application can commence.

So without a doubt, the credit application is absolutely necessary and becomes an insurance document, legally binding both parties once it has been signed by an applicant and accepted by the company. If future court proceedings are issued to recover overdue monies, this document will play a significant part in those proceedings so it needs to be right.

Design and content of a credit application and terms of trade document should not be under estimated. It should reflect and accurately record the company’s credit policy, operation, and terms of credit provision.

The application needs to indicate immediately to any potential customer that the business is just as serious about enforcing its trading terms and conditions, including the collection of overdue accounts, as it is in selling its products or services.

There are many government acts, administered by the Ministry of Consumer Affairs, that must be complied with when providing products or services, and these should be part of any credit application. However, these compliance rules can vary considerably depending whether the goods or services provided are for ordinary consumer use or are strictly for commercial purposes. 

Whatever the end use is likely to be, the finished document needs to clearly define what rights or remedies the customer may have under those appropriate circumstances. It must also establish the rights of the business and the rules under which they are prepared to extend credit and expect payment, as well as the action that can be taken should the customer default on payment. The application and terms and conditions need to be clear, concise and understood by all concerned.

The success of any business can depend on this document and no customer should have a credit account established without signing a credit application and the appropriate credit checks having been conducted. Having an unsigned application is like having no application at all as you may have default of payment remedies in the application but they are toothless if the application is not signed.

When trying to recover debts for businesses, DebtForce personnel see many credit applications that contain a lot of information provided by debtors that is absolutely pointless in that it can never be used to recover the debt because it is subject to the Privacy Act or client confidentiality restrictions.

Ensure the questions on your credit application form bear some relevance to the information you need to both fully qualify the entity applying for credit and for obtaining information that could help locate a defaulting customer should it become necessary later. For instance, an applicant’s date of birth is of more importance than the name of his accountant and bank manager.

Initially, the objective is to clearly identify the legal entity of the proposed customer as this will determine the type of information that is needed. An individual applying for credit has a different range of information requirement to that of a company, meaning what may be relevant for one entity does not apply to the other, and the laws of civil enforcement vary accordingly. 

There are many other types of entities such as Trusts, Incorporated Societies, and Marae’s where it is often hard to identify just who the legal applicant may be. In these cases, credit applications should only be approved by someone who understands these entity structures.

The actual terms of trade for the business providing credit can be simple if the operation of the business and the products and services offered are relatively straightforward. But where the product offered is of high value or the services varied, then the business needs to account for any eventuality in its terms of trade.

This is important but, at the same time, the credit application form must remain easy to complete and its terms and conditions readily understood. Don’t be tempted to copy another company’s application as it is unlikely to completely fit your situation and so there is a chance it may not be enforceable when needed.

It is recommended that the format of every credit application be reviewed at least every five years to ensure it is kept up to date with current legislation. The process should also include a revision of the current customer information held to ensure the original applicant remains the same company initially approved. 

 

If an account application is not renewed at the time a customer’s business changes hands, a messy situation can arise whereby the new owner may not be responsible for the account still held in the name of the former business. With neither the former business existing any longer and the new owner not having signed a new account application, the recovery credit monies can be difficult if the customer defaults.

When it does come time for reviewing or preparing an application, use professional organisations such as reputable debt collection companies that provide the service or solicitors that have civil litigation experience. They have a great deal of knowledge of what works and what doesn’t, as well as experience of the court process and outcomes based on the experiences of their own clients. 

There are many clauses that can be included into terms of trade and the preparation of these is a very specialised area where mistakes or exclusions can be very expensive. The inclusion of clauses that stipulate that the defaulting account holder pays all the costs of recovery including legal fees, can save a company thousands of dollars and enables them to be more aggressive in recovering overdue accounts.

The inclusion of clauses that enable the business to conduct enquiries as to the credit worthiness and integrity of a potential account holder is also important as unless such enquiries are undertaken, the credit application is of little use. 

However, while it is prudent for permission to be obtained for those enquiries to include officers of a company making the application as well as the company itself, be very wary of such clauses as any authorisation given by the signatory of the account application to access to another’s personal information as it does not conform with the requirements of the Privacy Act.

It is also prudent to have additional security built into the application by way of personal guarantees or by securing the goods themselves through the Personal Properties Security Register (PPSR).  Both of these need to be considered carefully for if they are not documented correctly, they will have no legal standing when needed.

The personal guarantee, when included in the account application, must be distinctly separate to the application so there is no confusion as to what the guarantor is signing. Segmentation of the guarantee provision is not the only essential matter for a binding guarantee. There also needs to be terms and conditions within the guarantee relating to payment defaults, and the remedies for recovery against the guarantor which must also be set out within the guarantee itself. 

This is crucial since each entity bound by the document, must clearly sign to those terms with the company being bound in the credit application itself and the guarantor separately bound by his or her guarantee.

Protective measures implemented under the Personal Property Securities Register (PPSR) should ensure all goods supplied to the customer be registered by way of a financing statement that primarily authorises the ‘giving of security’ over those goods by the customer applying for credit. But it is important that the requisite clauses are contained in the agreement at the time the customer signs it and not some time later. 

Secured goods can then be reclaimed by the creditor in the event of default or the security can be renewed as circumstances change. Although this registration process does not guarantee your goods will be paid for, it does provide a creditor with a greater degree of comfort and security than would otherwise exist. 

In summary, the credit application performs many functions and, when prepared correctly, can provide the business owner with some confidence that any potential losses out the back door are minimised. 

For more information about assessing your credit policies and documents or to recover overdue accounts, contact DebtForce Limited at 0800-332 836 or email enquiries@debtforce.co.nz or visit www.debtforce.co.nz 

By Steve Huggard