- The first mistake made by credit managers is not requiring personal guarantees on credited funds For monies loaned on credit to small or medium-sized companies, the credit manager should obtain a personal guarantee.
- The second “costly mistake” made by credit managers is not requiring a UCC-1 filing. In some cases, this is often not practical. Once the credited amount rises above $10,000, the credit manager should at the very least have his or her business become a secured creditor.
- Third, a creditor should add to its credit application the following sentence: “The parties agree that any litigation arising from this extension of credit shall be conducted in __________ County, Georgia, which shall have exclusive jurisdiction over any such legal proceedings.” The rationale for including such verbiage is that it forces an out-of-state business debtor to spend its time and money, including local counsel, to come to your local jurisdiction. For this reason, this may encourage settling, rather than litigating a disputed matter.
- Fourth, credit managers often fail to do due diligence on a potential business debtor and yet it is so easy to do. Simply, go to the appropriate Secretary of State Office, or its online website and look up how long the company to whom you wish to extend credit has been in business and identify its owners. This is a simple, yet important way to ensure the validity of the business.
- The fifth “mistake” made by credit managers lies in their inability to review a company’s credit application and other paperwork;, especially those from small-to-medium- sized companies. A company could be a low risk now, but in 12 months it becomes a major risk.
A simple check requires a review every 6 to 12 months with the top 3 credit reporting bureaus for each company to whom you extend credit. If the business debtor is not paying someone else, it may only be a matter of time before they stop paying you.
- A sixth danger is having no procedure in place when an account goes bad after 60 or 90 days. The smart credit manager establishes a set of follow-up dates for which letters go out or phone calls are made. Such follow-up may extend to bringing in counsel.
One common way to do this follow-up is to set up a relationship with a collection agency, so that they can be an extension of your credit department.
- Finally, credit managers should make use of credit limits. By setting limits, the creditor increases its cash flow. For example, if a business debtor is using $10,000 a month of your services, but only has a $5,000 credit line, you can require this company to cut checks to you every two weeks, rather than every four weeks. In short, ensure that the business debtors are not using your creditor company as a bank.
This article presents a general view of credit management and is not intended as legal advice. As state laws vary in this regard, credit managers should check the laws in their particular state, including the retention of legal counsel.
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President – Adams, Evens & Ross, Inc
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