Credit Applications: The Smart Way to Extend Credit
Merchants, landlords and anyone who extends credit via note, contract or lease should follow the lead taken by banks when making credit decisions. Make sure your applicant fills out a credit application. The credit application is a fact sheet about the debtor; often, it also includes credit terms. Part of the credit application should be a request for specific documents, such as tax returns, deeds and automobile titles. There are important reasons why you should obtain detailed information before you extend credit.
First, if there is a default, background information and a listing of assets will be invaluable during the collection process. It is imperative to have facts about the person’s employment, bank accounts, assets, address and social security number. This information may be difficult to obtain if the account goes into default.
Second, considered decisions regarding extension of credit can only be made based upon complete data. (See box below for tips on how to investigate credit-worthiness.)
Third, if the debtor was untruthful or misleading on the credit application, it may be possible to sue for fraud or oppose the debtor’s discharge in bankruptcy.
Finally, the terms and conditions regarding the extension of credit should be included in the application. In the absence of a written and signed agreement, the court will not award pre-judgment interest or attorney’s fees.
Make certain the applicant actually signs the credit application. An otherwise completed application is virtually useless against the debtor without this signature. Also, if you want a personal guarantee, prepare separate signature lines for the guarantors. The guarantee should be made clear by the terms of the credit application and the form of the signature.
Investigate Credit Worthiness
- Call other creditors of applicant
- Call industry contacts
- Check with landlords and credit references
- Obtain a Credit Bureau Report
- Review Dun & Bradstreet Reports
- Study court records for information about: Judgments, pending litigation, title to real estate, liens on realty, and UCC financing statements
- Hire an investigator or attorney Have your CPA review financial records
The above is not meant to replace legal counsel. To speak to an attorney about extending credit to applicants, contact Gross & Romanick directly by calling 703-273-1400.