Are you asking all the right questions?

By Alan Johnston September 01, 2014 Full Credit

Being often called on to review clients’ credit applications and terms of trade, I regularly see situations where the existing credit application form doesn’t request the ideal information for the purposes of credit checking or analysing credit risk.

Often the potential new client is also being asked for information that is either obsolete, or at the very least, politically incorrect, if not illegal to request!

So, what should your credit application contain, or ask for?

 

ARE YOU ASKING THE RIGHT QUESTIONS?

Firstly, it is only permissible to request information necessary for the purpose of assessing credit risk and credit checking. It is no longer acceptable to request information on a person’s spouse or partner, if that other person is not going to be a party to the agreement.

However it is important to get dates of birth from any Director, sole trader, or individual, if they are going to be a party to the agreement. This is necessary to formally identify the borrower when carrying out credit checks, as it is generally the only unique identifier available to positively determine the applicant is who they say they are!

Other unnecessary information that is still requested on many credit applications includes paid up capital, solicitors’, bankers’, and accountant’s names. Paid up capital has no relevance in today’s lending environment. And I can’t fathom why the customer’s solicitor, banker or accountant would offer information of value to a request for credit.

It is a little like a request for trade references. Why contact a name and cellphone number (which is often what is put forward) when you don’t know the relationship between the parties? Far better to peruse the Personal Property Securities Register (PPSR) for the names of not only the other credit providers, but also the person from those companies who filed the financing statement (which also handily provides their phone number!).

There can also be a danger in asking what credit limit the applicant is seeking. This may come back to haunt you if, at some stage during the relationship with the client, you endeavour to recover debt that has exceeded the requested figure on the application form.

This is particularly relevant when seeking to recover the excess debt from a guarantor. You may have limited the customer’s liability to the amount you have accepted merely by displaying it on the application! Better to ask what their intended monthly spend is going to be.

So, as a golden rule, when creating or reviewing your credit application for validity, you should ask yourself: “What is my purpose in requesting this information?” If you can’t answer that definitively, then there is little point in collecting it in the first place.

 

DO YOU HAVE THE RIGHT TERMS OF TRADE?

As far as the actual Terms of Trade or Terms & Conditions are concerned, it is important to have clauses that assist you not only in debt recovery, but also in giving you the best protection possible in case of disputes.

Personal guarantees should be worded in third party liability terms, so that the liability rests equally with all parties to the agreement and you can pursue the principal debtor (the company) or the guarantor(s) on an equal footing. This way you are not reliant on dealing with the failed company first, before having access to the guarantors’ funds. (Very often in the case of guarantees it is a first come, first served scenario.)

Make sure you are clear on the difference between “estimates” and “quotes” in your Terms & Conditions. It is advisable to use the former term wherever possible.

A suitable Ownership & Security clause relating to the PPSR is imperative today. It is not enough to rely on the old Romalpa clause when seeking to recover goods or debt. While a lot of people tend to see the PPSR as merely an option to repossess goods, the actual benefits of a suitably worded clause and properly registered financing statement far exceed the old Romalpa option and can even be very handy when it comes to defending a Voidable Transaction claim.

Make sure your application allows you recover costs in the event of a legal battle, and that any costs related to the debt collection can also be claimed so you are not out of pocket. Also install the right to claim penalty interest, at a reasonable rate.

Other areas of the Terms & Conditions that often fall short relate to suitability of goods, delivery access, substitution of goods, indemnity and exclusion of liability clauses, Consumer Guarantees exclusion clauses, and Construction Contracts Act references. However this list is by no means exhaustive.

So, while you may not want to alarm your customer by handing them a four-page document to sign, it is well worthwhile reviewing what is important to you. While you may not be able to include all the “nice to have” clauses, you can at least provide yourself with sufficient leverage to get a seat at the negotiating table, if and when the need arises.

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Alan Johnston is General Manager, CreditWorks Data Solutions Ltd, and has been involved in credit management for over 35 years. In 2011 he was presented with the NZCFI Credit Professional of the Year Award, for his achievements within the credit industry. Email him at alan.johnston@creditworks.co.nz or call him on 09 520 8133 to find out more.

 

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