CREDIT APPLICATIONS: TRICKS AND TRAPS

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1 CREDIT APPLICATIONS: TRICKS AND TRAPS Speaker: Wanda Borges, Esq. Borges &Associations, LLC Date: June 15, 2016 Time: 3:30 4:30 p.m. Session Number: 25092

2 CREDIT APPLICATION: NECESSITY/BENEFITS Formation of a contractual relationship Invoices are not contracts The credit application is often the only written agreement The credit application can provide information and specific legal remedies Terms and Conditions can be included Personal Guaranty may be included Security Interest may be included 2

3 ESSENTIAL INFORMATION ON CREDIT APPLICATIONS Type of business organization Principal place of business Any additional locations Business establishment details EIN number Date of establishment State of Incorporation or other type of organization Terms & Conditions of Sale Venue & Jurisdiction 3

4 NUMBER 1 TRICK: KNOW THY CUSTOMER Corporation: an artificial entity, formed and maintained in accordance with the statutes of a particular state of incorporation. Protects officers, directors and shareholders from personal liability provided compliance with state statutes is maintained. 4

5 KNOW THY CUSTOMER (cont.) Limited Liability Company Another type of artificial entity LLC s provide a protection similar to the corporate shell for members and managers of the LLC. Tax consequences generally the same as with partnerships. 5

6 KNOW THY CUSTOMER (cont.) Partnership An entity created by two or more persons (can be corporations or LLC s) For the purpose of operating a business Each partner completely responsible for all debt incurred by partnership 6

7 KNOW THY CUSTOMER (cont.) Limited Partnership Similar to a Partnership or Joint Venture Only the General Partner is responsible for partnership debt Imperative to know who general partner is 7

8 KNOW THY CUSTOMER (cont.) Limited Liability Partnership Similar to a Limited Liability Company Can only be formed by professionals doctors, lawyers, engineers, dentists, other licensed professionals 8

9 KNOW THY CUSTOMER (cont.) Sole Proprietor An individual operating with no corporate or other protection Individual remains totally responsible for all debts incurred in the business name 9

10 BUSINESS ESTABLISHMENT DETAILS Date of Incorporation (or creation of other artificial entity) if applicable Date of start of business State of incorporation (or registration of other artificial entity) if applicable Federal tax identification number 10

11 OWNERSHIP DETAILS Name Title Home Address Ownership interest 11

12 CREDIT APPLICATION: ESSENTIAL TERMS Correct Names Type of Business Organization Business Establishment Details EIN Number Becoming more and more important! Date of establishment of business State of incorporation or other type of organization Principal Place of Business Requirement for Change of Name or Ownership of customer 12

13 CREDIT APPLICATION: ESSENTIAL TERMS TERMS AND CONDITIONS OF SALE Interest Attorneys fees reasonable doesn t cut it Costs of collection 13

14 CREDIT REFERENCE INCLUSION Trade References Bank reference Authorization generally required: Applicant certifies that all information contained herein is true and correct. Applicant grants permission to to obtain independent credit reports or credit reports and other information from its references and bank, and authorizes the credit references and bank reference to release information to that may be used to determine credit worthiness. 14

15 INDIVIDUAL CREDIT REPORT AUTHORIZATION ADVISABLE FOR: Sole Proprietorship Partnership Small corporation 15

16 FAIR CREDIT REPORTING ACT FAIR CREDIT REPORTING ACT (FCRA) governs: Obtaining and using a Consumer Credit Report 16

17 FAIR CREDIT REPORTING ACT DEFINITIONS Consumer is any individual Consumer Report is any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer s credit worthiness serving as a factor in establishing the consumer s eligibility for (A) credit or insurance to be used primarily for personal, family, or household purposes; (B) employment purposes; or (C) any other purpose authorized under section 1681b of this title 17

18 FAIR CREDIT REPORTING ACT PERMISSIVE USE OF CONSUMER REPORT In response to the order of a court having jurisdiction to issue such an order, or a subpoena issued in connection with proceedings before a Federal grand jury In accordance with the written instructions or permission of the consumer to whom it relates In connection with a legitimate business need for the information 18

19 FAIR CREDIT REPORTING ACT NON-PERMISSIBLE PURPOSE The Federal Trade Commission has stated that the extension of trade credit was NOT a legitimate business need and insisted that written authorization be obtained prior to a trade credit grantor obtaining or utilizing a consumer credit report. 19

20 FAIR CREDIT REPORTING ACT PERMISSIBLE PURPOSE A business transaction in which an individual has accepted personal liability for business debt, such as in the case of a sole proprietor, partner, or guarantor, DOES provide a permissible purpose under Section 604 of the FCRA to obtain and use a consumer credit report 20

21 INDIVIDUAL CREDIT REPORT AUTHORIZATION Permissible business purpose though it may be, It is recommended that you include authorization in your credit application The undersigned is either a sole proprietor, a partner in a partnership, an individual who may be executing a personal guarantee in connection with the extension of credit to Applicant, or one of the principal stockholders of a corporation. I give permission to to obtain and utilize an individual credit report on me personally to determine my creditworthiness. 21

22 DISCLOSURE OF CREDIT LIMIT A TRAP TO AVOID Do NOT disclose amount of credit which Credit Dept. approves INTERNALLY Only advise customer yes or no Accept PO only after credit approved 22

23 TRICK INCLUSION OF ABILITY TO RESCIND CREDIT TERMS Clearly indicate Credit can be withdrawn at the discretion of Trade Credit Grantor Upon what circumstances Upon what notification 23

24 TRICK: VENUE & JURISDICTION PROVISIONS THAT WORK Venue & Jurisdiction Language that permits, but does not mandate, a particular state and/or court where a lawsuit may be commenced should be included on credit application This contract shall be construed under and governed by the laws of the State of. Any litigation concerning this contract may be commenced, at the sole discretion of credit grantor, in any local, state or federal court within the state of. 24

25 TRICK OR TRAP INCLUSION OF PERSONAL GUARANTY ON CREDIT APPLICATION Why have a personal guaranty? Who should sign it? Does it really help in collections? When does it get signed? Is there certain language to form a guaranty? What if she/he signs as President (or some other qualification)? 25

26 ESSENTIAL ELEMENTS OF A GUARANTY Party information Consideration for guaranty Signature as individual (not titled) Dated Witness/Notarization 26

27 UNACCEPTABLE GUARANTY Guaranty of Collection - BAD All collection efforts must be exhausted first before the credit grantor can seek recovery from the guarantor 27

28 ACCEPTABLE GUARANTY Guaranty of Payment GOOD A requirement to pay immediately upon a default in payment by the primary debtor 28

29 RECOMMENDED LANGUAGE FOR A GUARANTY The Guarantor acknowledges that this Guarantee is a Guarantee of Payment, and the Guarantor s obligations under this Guarantee are and shall at all times continue to be absolute and unconditional in all respects, and shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature whatsoever which might otherwise constitute a defense to this Guarantee and the obligations of the Guarantor under this Guarantee or the obligations of any other person or party (including, without limitation, the Customer) relating to this Guarantee or the obligations of the Guarantor hereunder. 29

30 TRICK OR TRAP INCLUSION OF A SECURITY INTEREST ON CREDIT APPLICATION There must be a granting clause Language within the Credit Application generally among the Terms and Conditions MUST specifically state that In order to assure payment to the creditor, Customer grants to creditor a security interest in [collateral must be named] 30

31 SECURITY AGREEMENTS CHECKLIST EVEN IF WITHIN CREDIT APPLICATION Security Agreement must be prepared Debtor/customer s name must be accurate Collateral Schedule must be complete Document must be signed or authenticated UCC Financing Statement must be filed 31

32 TRAP USE OF AN IMPROPER LOCAL FOR THE DEBTOR IS FATAL Financing Statement must be filed where Debtor is LOCATED Individual Debtor located at principal residence Organization with one place of business located at its place of business Organization with multiple places of business located at its chief executive office Registered organization (i.e. Corp/LLC/LLP) located in state of registration 32

33 Security Agreements Filing Information Electronic Filing Intention of Article 9 revisions is that all financing statements are to be electronically filed Filing Officer Generally Secretary of State May be a designated office for filings N.B. Louisiana still requires filings in parishes 33

34 Security Agreements Determine Necessity NECESSITY FOR SECURITY DEBTOR/CUSTOMER FINANCIAL CONDITION VOLUME OF SALES NEW CUSTOMER 34

35 Security Agreements Preliminary Steps PRECISE LEGAL STRUCTURE OF CUSTOMER RUN A UCC SEARCH REVIEW CUSTOMER FINANCIALS NEGOTIATE COLLATERAL TO BE TAKEN 35

36 TRAP - PURCHASE MONEY SECURITY INTEREST WITHIN A CREDIT APPLICATION NOT ADVISABLE UCC search Mandatory Need to know if prior secured parties have lien on same goods you will be selling Notification to Prior Secured Parties Mail Facsimile Transmission Electronic Transmission 36

37 PURCHASE MONEY SECURITY INTEREST Covers only goods you sell or finance Includes Products Includes Proceeds Ability to become #1 Notification to Prior secured parties essential 37

38 PURCHASE MONEY SECURITY INTEREST PROCESS Necessary Steps Timing of Notification Prior Secured Party need not respond Prepare paperwork File UCC Financing Statement 38

39 TRICK - INTEREST AND SERVICE CHARGES NEED TO BE CONTRACTUAL To enforce interest or service charges on past due sums, language to that effect must be included on credit application (or some other contractual document), not just on invoice: Applicant agrees to pay all bills as rendered, and agrees that overdue accounts are subject to monthly service charges of one and one-half percent (1 ½%) per month or the maximum interest rate allowable by law in the state where the customer is located. 39

40 TRICK COMPLIANCE WITH EQUAL CREDIT OPPORTUNITY ACT The Equal Credit Opportunity Act (ECOA) is a federal law that makes it unlawful for any creditor to discriminate with respect to the extension of credit against an applicant on the basis of sex, race, color, creed, national origin, age or marital status. 40

41 EQUAL CREDIT OPPORTUNITY ACT Must be followed whenever there is an adverse action Adverse Action means (i) refusal to grant credit in substantially the amount or on substantially the terms requested in an application (ii) a termination of an account of an unfavorable change in the terms of an account that does not affect all or substantially all of a class of he creditor s accounts (iii) a refusal to increase the amount of credit available to an applicant who has asked for increase 41

42 EQUAL CREDIT OPPORTUNITY ACT Adverse Action DOES NOT INCLUDE: (i) a change in terms of an account expressly agreed to by an applicant (ii) action or forbearance relating to an account taken in connection with inactivity, default, or current delinquency as to that account. (iii) a refusal because creditor does not offer the type of credit or credit plan requested 42

43 TRICK - GUARANTY OF PAYMENT LANGUAGE THAT WORKS The Guarantor acknowledges that this Guarantee is a Guarantee of Payment, and the Guarantor s obligations under this Guarantee are and shall at all times continue to be absolute and unconditional in all respects, and shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature whatsoever which might otherwise constitute a defense to this Guarantee and the obligations of the Guarantor under this Guarantee or the obligations of any other person or party (including, without limitation, the Customer) relating to this Guarantee or the obligations of the Guarantor hereunder. 43

44 TRAP GUARANTY BY SPOUSE The ECOA specifically prohibits requiring a spouse to execute a personal guaranty UNLESS The credit application does not qualify for the extension of credit and property which could secure the debt is held by the spouse The customer resides in a community property state (check with local attorneys) The applicant is offering property to secure the future debt and the signature of the spouse is necessary in order to reach that property. 44

45 AVOIDING THE SPOUSAL GUARANTY TRAP DON T use the word spouse Use co-guarantor then it can be anyone who qualifies Ascertain if spouse is actually involved in the business then he/she is simply a guarantor 45

46 EQUAL CREDIT OPPORTUNITY ACT TRICKS THREE EASY STEPS TO COMPLY WITH ECOA 1. Give Requisite ECOA Notification that creditor adheres to the ECOA 2. If an Adverse Action occurs, notify applicant within a reasonable period of time AND let applicant know that it has the right to know the reasons why 3. If a written inquiry is made as to the reasons for the adverse action, provide that information to applicant and keep all records relating to that adverse action together with advice as to the reasons for at least 12 months 46

47 EQUAL CREDIT OPPORTUNITY ACT Recommended Notification on Credit Application If your application for business credit is denied, you have the right to a written statement of the specific reasons for the denial. To obtain the statement, please contact {name, address and telephone number of the person or office from which the statement of reasons can be obtained} within 60 days from the date you are notified of our decision. We will send you a written statement of reasons for the denial within 30 days of receiving your request for the statement. 47

48 ADDITIONAL TRICKS Participant s Opportunity to offer their personal Tricks 48