Reducing your credit losses

By William K. Strong Attomey at law Strong & Pugh, P.A. Phoenix, Az.

Expanded Credit

lenders may be happy to make a home improvement loan to the customer. Commercial factoring companies can also provide funds for financing work-in-progress for your customer. Your role in facilitating such transactions should be limited to introducing your customer to the lender. You should not guarantee your customer's debt to the lender or agree that the lender would have recourse against you if the customer does not pay.

Limited Credit

If you find the "cash and carry" policy too restrictive, the next step would be to extend limited credit. Such limitations may be to open accounts only for those who give you a written credit application agreeing to your terms (when payment is due, a finance charge and an attorney's fees provision, among others), providing financial statements (updated at least annually), and a personal guarantee if the customer is a corporation.

A modest credit limit also should be set on the account and enforced. With computerized bookkeeping and billing in widespread use, your software may have a builrin function to warn one posting invoices that the account will go over the limit when a current sale is posted so that prompt measures can be taken to extend no further credit.

Joining TRW, Dun & Bradstreet or another credit reporting agency might be a good source of information to supplement customers' financial data in their credit applications. Data from a credit reporting agency can be helpful in deciding whether to open an account for the customer and what credit limit to place on the account.

If expanded credit is to be provided, additional steps should be taken. You could obtain accounts receivable insurance on some of your customers. Your insurance agent can put you in touch with an insurance company offering such a policy. The primary purpose of this insurance is to protect receivables against excessive credit losses. View it as a method of safely increasing sales by extending credit to customers you were not previously selling on credit or by increasing the account limit on existing customers.

A common arrangement would be that for a premium of l%o of the accounts to be insured, the insurance company would take the risk of noncollection on the account of a named customer up to a set dollar limit. If the insurance company refused to provide coverage for a customer, you may take that as a sign you should not advance credit either.

Materialmen in the construction industry often advance credit to customers, not on the basis of the customer's inherent net worth, but on the basis of the customer's cash flow from it providing labor and materials for performing a construction contract. In this setting, it is essential to take steps to protect and perfect mechanics'/materialmen's lien rights and rights against payment bonds which may apply.

These steps vary considerably from state to state and the rules applicable to claims on payment bonds on federal public works projects (required by the Miller Act) may differ from the law of your state.

Advancing credit relying on lien and bond rights for collection is administratively time-consuming. One providing credit to this extent should have at least a part-time credit manager to look after the manv details.