By Wilson Cole
Any time you or your business extends credit you run the risk of some or all of the funds will not be repaid. On the other hand, choosing to not extend credit at all may forsake tens of thousands of dollars of business revenue for fear of potentially losing a couple of thousand dollars in credited funds. Proper credit management is the art of effectively balancing this risk. A credit manager must neither be afraid of risk nor focus to much on loss.
1. The first and foremost mistake made by credit managers is their not requiring personal guarantees on the credited monies. In some cases, this is neither necessary nor practical, e.g., your client is The Coca-Cola Company. For monies loaned on credit to closely- held or medium-sized companies, the credit manager should obtain a personal guarantee.
2. The second “deadly mistake” made by a credit manager is not requiring a UCC-1 filing. Again, in some cases, this is not practical. Once the credited amount rises above $10,000, the credit manager should at the very least have his or her creditor business become a secured creditor.
3. Third, a creditor company 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 debtor business to spend its time and money, including local counsel, to come to your local jurisdiction. Just its inclusion may very well encourage settling rather than litigating a disputed matter.
4. Fourth, credit managers often fail to do due diligence on a potential debtor business 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 who are its owners. This is a simple yet important way to ensure the veracity of the business’s self-promotion.
5. The fifth “mistake” made by credit managers is in their not reviewing a company’s credit application and other paperwork, especially those from small-to-medium size companies. A company could be a low risk now, but in 12 months becomes an unreasonable risk.
A simple check is to review every 6 to 12 months the top three creditors of each company to whom you extend credit. If the debtor business is not paying someone else, it may only be a matter of time before they stop paying you.
6. A sixth danger is having no procedure in place when an account goes bad after 60 or 90 days. The smart credit manager establishes set dates of follow-up after 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.
7. Finally, credit managers should make use of credit limits. By setting limits, the creditor business increases its cash flow. For example, if a debtor business is using $10,000 a month of your services, but only has $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 debtor companies 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 local legal counsel.
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