Good credit practices to minimize business losses

By HunterMaclean Attorneys, special to Business in Savannah

Most business owners are well aware of the benefits of extending credit to customers — a practice that can bring in new business, encourage increased spending, and generate trust among clientele. However, most business owners have also experienced the strain of late payments or complete nonpayment. A few basic good credit practices at the initiation of the credit relationship can help minimize potential future losses.

In smaller communities like ours, business is often conducted informally and even on a handshake, but a credit relationship needs to be formalized in order to be safe and effective. While a credit application may feel invasive among longtime customers, it’s critical to have this documentation in place. Failure to seek pertinent information in credit applications can both hinder lenders’ ability to assess customers’ creditworthiness and make it more difficult to collect on overdue debts.

As a starter, the credit application should require basic information such as the customer’s Employer Identification Number, the Social Security numbers of the customer’s principals, the address or electronic addresses for receipt of invoices and official notices, and all other contact information. According to the goods or services being provided, it may also be advisable to seek a personal guaranty from individuals associated with the customer, whether they are the principals or not. In the small business world of handshake deals and negotiations over lunch, these formalities may come across as impersonal to some customers, but they are essential for successfully collecting payment where credit is extended. Verbal agreements, while sometimes valid, may be difficult and expensive to prove in a court of law.

There are other ways to strengthen an existing system of open credit with clients. Creditors (or their accountant, should they have one) should implement a system for calculating interest on customer accounts, a “tickler system” to regularly remind customers who have outstanding debts, and a protocol for establishing when to rebill and when to terminate a client’s credit. As with the credit application process, it’s important to be exacting about collections, even when the debtor is a longtime customer.

In a perfect world, debts are repaid and the credit-extending business would not have to seek legal action to recover. However, cash flow problems and unforeseen circumstances may require collection efforts. As a part of those collection efforts, businesses may enjoy lien rights or may be entitled to collect attorney’s fees. Beyond that, as seen during the most recent economic downturn, many customers resort to filing bankruptcy. A new set of rules governs collection in Bankruptcy Court. In each of these scenarios there are deadlines with which the creditor must comply. It is important to seek legal counsel should a credit-providing business find itself in any of these situations.

Credit is an important aspect of every modern business, but it has to be managed well. Fully informed business owners with the proper support system in place can minimize losses — and maximize gain.