While no one wants to think about a new client becoming a debtor, it’s important that a credit agreement is in place from day 1 to protect your company. In this 5 Minute Legal Master Series episode, Bernstein-Burkley, P.C. Partner, Nicholas D. Krawec, discusses what should be included in credit agreements, and why.
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Credit Agreements (5:07)
Welcome to the 5 Minute Legal Master series where expert attorneys help you master important legal topics. Today, board certified creditors’ rights attorney, Nicholas D. Krawec discusses credit agreements.
Welcome! Today I want to talk to you a little bit about credit agreements. In the euphoria of getting a new customer not many creditors, especially their sales departments, want to think about their customer becoming a debtor down the line. However, when a creditor extends credit to that new customer he is essentially lending his company’s money and there is a risk that the creditor may not get paid by this customer. Therefore, the outset of the business relationship with a new customer is precisely the time to be proactive, to anticipate what rights and remedies you as the credit granter will want and need to have at your disposal if and when the new customer becomes a non compliant debtor. You have to prepare for collection from day one and no one likes to think about that with a new customer, but the creditor needs to create a new environment where the customer is made clearly aware that the creditor expects timely payment, this starts with the credit agreement. The credit agreement must clearly set forth the payment terms and conditions.
If the new customer’s credit worthy warrants it then the creditor should require other creditor enhancements which we will talk about in a few moments. The credit agreement should identify the legal form of the customer, it is a corporation or proprietorship? This will obviously identify who is responsible for payment. Creditors should periodically review the account and watch for possible changes in the legal form of the customer during the course of dealings. For example, has the business form changed from a proprietorship or partnership to a corporation or limited liability company?
The credit agreement should also identify who at the customer is authorized to make purchases or incur charges on the account. I recommend adding a provision that puts responsibility on the customer to notify the creditor of any such changes in that responsibility. Next, set for the credit and payment terms. What is the credit limit, how much credit are you willing to extend to this customer? Closely monitor the account balance to ensure it does not exceed the level of credit risk that you as the creditor determined to undertake. Not every customer has the same credit history so not every customer should get the same credit terms. Be clear about when payment is due, encourage timely payment by offering discounts for early payments, identify what the consequences are of default. You can reserve the right to unilaterally change credit terms or even cut off credit if the account falls into arrears. You can change the credit account to COD or Cash in advance until the arrears are cured and they can go back to continued payment according to the original terms, it may clear the legal consequences of default, a lawsuit.
The next question to ask yourself is what are the interest of finance charge terms? After all the debtor who does not pay you is using your money. In the absence of an agreement with regard to interest, the creditor is generally limited to an interest rate set by statute which in Pennsylvania is 6% per annum. For interest rates or service charges in excess of the stature rate, contractual interest terms are required. You can only recover your collection cost and attorney’s fees when you see a debtor if it is part of the contraction or statutory authorization for attorney’s fees. You want to put the attorney’s fee provision in your credit agreement and make the debtor responsible for your attorney’s fee if you have to proceed with suit.
If the credit applicant is border line credit worthy, consider this credit enhancements I mentioned earlier, a personal guarantee from the principle(s) of the corporate debtor, maybe include the confession of judgment clause which will allow you to confess an immediate judgment in the event the debtor defaults on the account. You may seek a security agreement where the debtor grants the creditor a security interest in his assets and the lien of that security interest will cover the debtor’s assets once the lien is perfected by the filing of a UCC1.
There is a lot to go into a credit agreement. For excellent information about a disciplined and responsible credit policy of which a well drafted credit agreement is an integral part, I would encourage you to visit the website www.getpaidsystem.com to learn more about my colleague, Bob Bernstein’s get paid system and his book, “Get Paid, A Guide To Getting Paid Faster and What To Do If You Don’t.”
Thank you for listening!
This has been another installment of the 5 minute Legal Master series where expert attorneys help you master important legal topics. For more information on this and other topics please visit 5minutelegalmaster.com