As a lawyer who practices in both collections prosecutions and defense matters, I have handled numerous cases for clients who have made some mistakes when extending credit to their customers over the years. Here are 5 tips you should follow to ensure that you are doing all you can to protect your business from losses and pursuing customers to recover.
- Don’t assume that the customer will pay back what is owed because you have a trusted relationship. Yes, there is value in having an established relationship, and that brings back return business. But in extending credit, you really must look at why your customer needs the extension. Is their business in financial hardship (which should be a clear red flag that the ability to repay is limited)? Are they expanding and have a larger order to fulfill? These two scenarios are two very different considerations that should impact your decision. Make sure that you inquire into what is going on before granting the request.
- Ensure that all of your customers fill out a credit application. Not only can you get insight into the company’s assets, but you can also gain insight into the debts and whether or not the risk of the credit extension is too significant.
- Ask for financial records and, most importantly, check into those finances to ensure that if a customer states they have assets, they truly exist. Many customers will be led to elaborate on their assets to make them seem more valuable than they actually are, so do your homework to ensure that the assets aren’t already hindered with other liens or being held as collateral and there aren’t any other encumbrances that would take priority.
- Don’t stop at a credit application. Ensure that you get a contract that states the terms and conditions of the credit extension and repayment terms. A contract is standard practice and good business. Have an attorney look over your contract to make sure you are protected. For example, if there is a default in payment and you have to pursue litigation, you will be in the proper jurisdiction and venue. Your attorney fees incurred in pursuing payment are covered by the customer.
- Make sure that you have a persona guaranty. If you are extending credit to a business, there is always a chance that the company can go under. Rather than be left out of recovering, make sure that you have the owner provide a personal guaranty that states that even if the business cannot repay, the owner will. This is one certain way to ensure that the customer is serious about repaying. In most cases, if the owner is not willing to put themselves on the line, you already have a red flag and should look into other collateral sources to ensure repayment happens.
Following these tips will help your business extend credit in a manner that continues to bring back repeat customers and grows your business but also ensures you are repaid. Before extending credit to your customers, it is best business to seek a consultation from an attorney to ensure your credit application, contract(s), and personal guaranty are protecting your business.
To find out how the collections attorneys and team at Andalman and Flynn, P.C. can help you, please visit Andalman and Flynn Collections.
Contact us at 301-563-6685.
About Andalman & Flynn Collections: For decades, businesses and professionals have been turning to the experienced collections attorneys at Andalman & Flynn for their debt recovery needs. A licensed collections agency, their experienced team successfully navigates the complex laws surrounding debt collection practices. The firm combines cutting-edge technology with savvy, effective debt resolution methods that result in high success rates and fast recovery times. For more information, please visit www.andalmanflynncollections.com.