If you have been looking for ways to boost sales for your business, you might be considering extending lines of credit to your clients or business partners. While this is a good way to boost sales, it also comes with some risks. The following FAQ will answer some of your most burning questions about extending credit and might help you to decide whether it’s right for your business.
1. Question: What do I need to know about the laws for extending credit?
The practice of extending credit is governed by a federal law called the Credit Practices Trade Regulation Rule, which covers three major areas. It prohibits creditors from using unfair contract provisions, requires creditors to inform cosigners of their potential liability if the main customer fails to pay, and bans late charges in certain situations. All creditors, except those governed by the Federal Reserve Board or the Federal Home Loan Bank Board, are required to comply. Creditors who violate the law could pay up to $10,000 per violation.
2. Question: What type of credit should I accept?
Creating your own store credit card is not the only way to extend a line of credit. Accepting checks or big name credit cards are other ways to extend credit. Accepting well-known credit cards is not very risky, especially if you understand the company’s policies, including the fact that they charge a merchant fee between 2 and 6 percent. Checks are riskier because if the customer doesn’t have enough money in his or her account to cover it, it could be returned to you unpaid. This leaves you to fight the customer for your money and could result in paying more in legal fees than the check was actually worth.
3. Question: How do I decide which customers to extend credit to?
You should examine your customer base and go from there. Some companies decide only to offer lines of credit to business customers, but others extend it to traditional consumers. Create a set of guidelines to follow during the application process. Have customers fill out a written application, and consider asking them to provide financial statements to help you make your decision. Be sure to check applications against credit references and to obtain a credit report for each applicant.
4. Question: How should I handle past due accounts?
Determine your collection procedures prior to extending credit to anyone. If a customer doesn’t pay on time, follow your procedures to the letter. Don’t let customers slide on payments, but do expect them to have excuses. When they give you excuses, remain calm and ask for a specific date and amount in which you can expect a payment. Understand that some cases will require you to turn the account over for collection, but don’t tell the customer this unless you are actually going to turn it over.
5. Question: I read all the information, but now what?
It’s time to get started! For the process of extending credit to go as smoothly as possible, consider hiring a professional who is well-versed in writing contracts and who understands the specific laws surrounding extending credit. The contract should cover information regarding how much credit you’re willing to offer, what your application process requires and your decision process, and how long a customer has to pay when using their line of credit. It should also provide all information regarding your procedures in the event that a consumer does not pay on time.
6. Question: OK, but is all the work really worth it?
Only you can determine that. If your business is doing well enough with simple cash transactions, you might consider not extending credit. However, if you want to know for sure if extending credit works for your business, consider starting small by personally offering it to regular customers who you know you can trust. This will help you get a feel for the process before opening the offer up to other customers.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.