Credit Application: Include Credit Terms and Agreement

After your credit department has a mission, goals, and has started the work of determining what questions will be asked of potential credit customers on the credit application, it’s time to fit the credit application within the framework of your credit policy as a whole. Making sure the customer is credit worthy is the first step, but including the terms under which credit will be extended, and an agreement for both how the credit application will be used and for the extension of credit is also important.

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Include Information About Use of Information Provided on Credit Application

You want to make sure that the potential credit customer provides the complete and correct information on the application, and is made aware of how the information provided will be used. Since the information provided will, at least in part, determine the credit to be extended to the customer, it is important to make sure the information is accurate. Including a clause like the one below helps to guard against incomplete and/or incorrect information.

• The applicant certifies that the information contained herein is complete and accurate and understands that it is to be used to determine the amount and conditions of the credit to be extended.

It is also important to make sure that the customer knows how the information provided is going to be used. The customer needs to consent to you running a credit check – business or individual. Simply including the following clause, or one substantially similar on the credit application provides the necessary consent.

• The applicant consents to the obtaining of credit and/or other information to be used at any time in connection to the account hereby applied for; and consents to and authorizes the release of any credit and financial information by any bank, trade reference, mortgage holder or landlord, and credit reporting agencies, and expressly consents to [creditor] obtaining a consumer credit report of the undersigned, and a business credit report of the applicant for the purposes of evaluating credit worthiness.

Include Terms of Payment and Credit Extension on Credit Application

For some businesses, it may be beneficial to include the terms of payment and/or the terms under which credit will be extended on the application itself. This provides clear receipt of the terms by the customer, and requires the customer to agree to your payment terms and credit conditions as a prerequisite to even applying for credit. However, if the terms are included on the application, any potential modification to the general payment terms would then need an additional signed document. For businesses that do not intend to modify the general credit agreement for any customer – regardless of size, etc. – including the terms on the application can make a lot of sense. Business that routinely modify terms (this post makes no comment on whether that is a good idea) may want to wait until a credit decision has been made before setting out the terms.

If the terms are included on the application itself, potential terms that may be included are as follows:

• All Invoices are to be paid within 30 days of the date of the invoice
• Invoices unpaid at the expiration of 30 days from the date of the invoice will begin to accrue late payment service charges at the rate of 1.5% per month, beginning on the 31 st day from the date of the invoice.
• Claims arising from invoice must be presented to ________________ in writing within 10 days from the date of the invoice.Applicant further expressly agrees that it shall be liable and pay all attorneys’ fees, collection costs and court fees, and any other expenses, whether or not incurred in connection with litigation, including but not limited to attorneys’ fees and costs associated with the enforcement of any of the terms of this Application and attorneys’ fees and costs resulting from a default under this Application.
• Applicant further expressly agrees that it shall be liable and pay all attorneys’ fees, collection costs and court fees, and any other expenses, whether or not incurred in connection with litigation, including but not limited to attorneys’ fees and costs associated with the enforcement of any of the terms of this Application and attorneys’ fees and costs resulting from a default under this Application.
• [Creditor] reserves its right, at its sole discretion and without notice, to cancel all available credit and refuse to make future advances.

Get Security by Including it on Credit Application

It is also possible to use the credit application as part of your credit policy strategy to secure your extensions of credit. As with including payment terms on the application itself, the inclusion of security grants may be a customer-by-customer decision. Clearly, you may not wish to include a personal guarantee on the credit application of certain customers. However, when applicable, the inclusion of a personal guarantee as part of the credit application, and including a grant of a security interest, can secure your extensions of credit and help get you paid. Remember, though, that if a personal guarantee and/or security agreement is included, each document must be signed individually.

When it makes sense, consider including a personal guarantee on the credit application, and include a clause such as the one below (and attach a Security Agreement) to more fully protect yourself from non-payment.

• The applicant, as a condition to receiving credit, grants ___________________ a security interest in Applicant’s accounts receivable and their proceeds, as well as in any specific property more fully described by the following security agreement, (attached hereto as Exhibit A) — and consents to the filing of a UCC Financing Statement concerning same to perfect this security interest.

Not only does a proper credit application help you make a decision as to which customers are credit worthy (and in what amount), it can also provide security and become the first step in making sure you get paid.