Is Your Credit Application Good Enough?

Use Your First Line of Defense Wisely

What should a good credit application do for you? In addition to providing you a basis for determining whether your prospective customer is credit worthy, it also sets forth your terms and what will happen if your customer fails to pay you.

1. Name of Entity

If the potential customer is a corporation, a company can check with the Secretary of State's Office at (617) 727-2850 to confirm the name, address and existence of the corporation as well as the names of its officers. A company can also obtain this information on line.

2. Type of Entity

A potential customer may be an individual, corporation, partnership, limited partnership, family trust, nominee trust or a proprietorship. This information enables a company to determine if the person signing the application has binding authority. It may also raise a red flag as to potential collection difficulties in the event of a sudden outbreak of "deadbeatitis".

3. Address of Entity

Do not merely trust potential customer's representations. Verify everything. If the address listed does not match that at the Secretary of State's Office, ask why.

4. Whether Entity Owns or Rents

This will provide you with valuable insight into the financial strength and weakness of your customer.

5. Name of Landlord

This information may disclose a hidden asset.

Before selling goods to a customer or providing them with services, a company should take all steps possible to make sure that they will get paid. A signed credit application is essential. It could request, among other things, the following information:

1. Banking Information with Account Numbers and Designation of Type of Accounts - Every credit application should find out where a potential customer has its bank account(s) and the account number for each account. This allows you to check the truthfulness of your potential customer and paints a target for future bank attachment in case of a sudden outbreak of "deadbeatitis."
2. Name and Address of Principal(s), Their Social Security Number and Date of Birth - If the person signing the application is not a principal; you should ask why and seek proof that he or she is authorized to sign the credit application. If multiple principals exist, you should consider seeking multiple guarantors.
3. Tax Identification Number of Entity - Tax identification numbers and social security numbers can help you determine the credit worthiness of a potential customer through various credit bureaus. It may also be helpful in the search for assets to attach if today's potential customer evolves into tomorrow's delinquent account.
4. Whether the Principals Own or Rent
5. List of Authorized Personnel - Knowing who is authorized to order your product or services and pick up or receive the order or services can save you hours of grief. It can also help reduce possible defenses to your collection action.
6. Trade References
7. Rate of Interest
8. Payment of Attorneys Fees and Amount of Attorney's Fees
9. Forum/Venue Selection (Where suit must or can be brought)
10. Personal Guarantee
11. Right to Investigate Accuracy of Data and Credit Information

With almost 30 years of experience, the Law Offices of Alan M. Cohen LLC assists clients with preparing and reviewing the credit applications of potential debtors.

We represent clients throughout Middlesex County and Boston, Massachusetts. Contact us online or call 508-620-6900 to schedule an appointment with an experienced debt collections lawyer.

Do Homework Before Giving Credit

• Part 1: A good credit application will require ample information about the entity that is borrowing money. This should include their name, address, type of entity and information about their property or landlord.
• Part 2: A good credit application should be written with teeth. You need to sink your teeth into customers before they take a bite out of the finances of the company. A credit application should include information about their bank account, their identification, tax identification number and a list of personnel who can back them up.
• Part 3: Although a good application does not need to include all the information detailed above, it is important to carefully decide what information collected from which debtors. Mr. Cohen helps clients use the credit application to help control their money. The credit application is the first (and maybe the last chance) before making the sale to control the terms and conditions of the commercial relationship.

Is Your Personal Guaranty Effective?

An important part of a credit application is the "personal guaranty." Yet, many suppliers of materials and/or services either don't seek a guaranty or don't review the guaranty when it is returned. Often a guaranty is seen as surplus. It is not. It may be your last chance to get paid.

One of a debtor's most prevalent tricks is to put the tag "president" or "agent" after signing the guaranty. Even if your guaranty says that it is a "personal guaranty" or that the undersigned is "individually liable," a crafty "guarantor" will still claim that they are not responsible because of the tag "president" or "agent" after the name. Don't leave this to a judge's discretion.

You can avoid this "defense" by refusing to accept any guaranty in which the "guarantor" attempts to negate individual liability. However, even if the debtor slips one by you, don't abandon ship.

The Supreme Judicial Court in Bisonnette v. Keyes , 319 Mass. 134 (1946), held that the mere use of the description word "agent" does not by itself avoid individual liability. Decisions of the Appellate Division of the District Court can be interpreted to hold that where a guaranty distinguishes between the customer and the guarantor, the addition of the mere descriptive term "president" after the guarantor's name did not negate individual liability.

Although it would be better to avoid this dilemma, a properly worded guaranty can improve your chances of getting paid, even if the debtor plays it cute.

Contact us to learn more about the defense techniques Mr. Cohen offers. Use the online form or call 508-620-6900.

Success Story #1: Your top salesperson says that a buddy of his wants to make a large purchase from you. If you keep the reigns of credit too tight, your sales suffer. If you let the reigns too slack you risk deadbeatitis.

What should you do? Do you require the new potential customer to complete the equalizer - your credit application - or do you rely on your salesperson's instincts.

Company A chose "sales, sales, sales" and relied on its salesperson without seeking a credit application. Had Company A obtained a credit application, it would not have sold anything to the deadbeat. The credit application could have shown that the deadbeat had recently filed bankruptcy and was in the process of "reorganizing."

A few months passed without getting any payment. Company A became very nervous - to the tune of $50,000.00.

Company A called our firm. Within a few days, we obtained an ex parte bank attachment, keeper attachment and bulky goods attachment.

Relying upon an obscure statute, the deadbeat's bank, which had a security interest in the deadbeat's assets, forced our client to dissolve its attachment. The bank then seized and sold the deadbeats assets. After the asset sale, the deadbeat again filed bankruptcy.

Company A became an unsecured creditor whose chances of collecting any of its $50,000.00 ordinarily would have been slim and none. You know the rest of that story.

However, due to our diligence and persistence in the Bankruptcy Court, our client recovered $12,500.00 in settlement of an adversary proceeding.

Company A's actions show the pitfall of an unchecked sales policy. Company A might have avoided this substantial loss. First, it should have done a diligent examination of its potential customer's creditworthiness and should have required a credit application.

Second, in light of the prior bankruptcy, it should have perfected a security interest in all of its future customer's inventory, accounts receivable, etc. This would have made it a secured creditor in any later bankruptcy proceeding.

If Company A had done any homework prior to the sales, it might not have lost $37,500.00. Although there is no guaranteed or foolproof way to make sure that a customer will not beat you, at a minimum following these suggestions may help you avoid repeating Company A's costly mistake.

The Law Offices of Alan M. Cohen LLC represents clients and sues debtors in Middlesex County, Boston, Bristol County, Suffolk County, Springfield, Hampden County, Norfolk County, Dedham, Plymouth County, Salem, Brockton, Essex County, Cambridge, Worcester, Worcester County, Barnstable County and throughout Massachusetts.

The information you obtain at this site is not, nor is it intended to be, legal advice. Nor shall contact through said site establish an attorney client relationship, absent a formal fee agreement. You should consult Attorney Alan M. Cohen for individual advice regarding your own situation.