Extending Credit While Protecting Your Interests
Q: As a small business owner I am wary of extending credit to certain customers. But my business depends on it. How can I offer credit to customers and at the same time protect my interests?
A: There are some sound strategies you can incorporate into your business practices for tipping the scales in your favor from the start of the transaction. First, make sure your credit and sales people are on the same page. Set up a standard risk assessment protocol and follow it without fail. Second, include a confession of judgment clause in your agreements. This gives you the right to have a judgment entered against the debtor without trial. Third, get written personal guaranties from the principals of the debtor company, including partners, shareholders and, if necessary, spouses. If you are conducting business in a “tenancy by the entirety” state such as Pennsylvania, you will not be able to attach jointly held marital property to settle the debts of one spouse. Fourth, avoid offering credit on “open account.” Instead, create a security interest such as a lien on other assets of the customers. And fifth, keep tabs on your interests. Take the time to inspect your secured property to make sure it will be around if you need it. Be sure to have a credit policy that assures you will be informed of any transfers of secured property.