IMPORTANCE OF THE CREDIT AGREEMENT
The credit agreement or credit application is a necessary document that begins the relationship between a seller and buyer of goods and/or services. Can you sell to a customer without obtaining a credit agreement? Yes. Should you do it? No! How you begin your relationship can determine its success or failure. In addition, information you obtain initially may stop or modify a potentially bad relationship before it starts.
What should be included in the credit agreement and why? You need to obtain as much information as possible about your customer. The legal name, whether it is a corporation, partnership, LLC, or sole proprietorship, plus the names, addresses, and Social Security numbers of all officers, partners and owners is critical. Banking information, credit references and affiliated companies provide further background to check and verify. One or more personal or affiliated company guaranties give additional protection. Provisions setting interest rates for late payment, payment of collection costs and attorney fees if there is a payment default, and a venue provision allowing the seller to sue where the seller is located, if it chooses to do so, are protections in case legal action is necessary.
The information obtained in the credit agreement is used to make the initial decision to grant credit and, if so, how much. It can be used by third parties hired by the seller to do a thorough credit check on the buyer to uncover potential problems before they happen. The credit agreement subsequently is important to provide the maximum protection if there is a later default on payment and collection action, including legal action, is necessary. The ability to obtain information and a written signed agreement diminish after a problem arises, which is the time that information is most necessary. The credit agreement should be signed by the customer, by an authorized person such as an officer, partner or owner, and the signature should be witnessed and/or notarized to increase enforcement upon default.
Obtaining a credit application is like going on a first date. It is a time to learn about the other party and decide if there is the potential of a relationship. The more you learn at the time when the parties should be truthful, the more you can verify and, therefore, protect yourself from long-term harm.
Remember, obtaining a full, complete and signed credit application is only important when a problem arises. Unfortunately, since you don't have a crystal ball, it means the credit application is important every time you start a new relationship with a customer.
The old adage, "hope for the best, but plan for the worst" applies to the credit application.