Model Business Credit Application and Terms and Conditions of Sale

A properly completed and executed credit application is vitally important to trade creditors.

The best time to request this information is at the inception of the trade credit relationship—when the customer is usually the most cooperative. Obtaining all of the requeste information in a thorough credit application as a foundation, and then updating and supplementing a customer’s information from time to time, is just plain old best practice.

The information a customer provides in a credit application plays a critical role in the decision to extend trade credit, but the importance of a credit application does not end there. Gathering vital information about the customer up front helps prevent headaches throughout the trade credit relationship. Having this information aids in collection efforts, assists in evaluating future requests for additional extensions of credit or increases in a customer’s credit line, and also increases the effectiveness of risk mitigation tools (such as letters of credit, guaranties, consignments and purchase money security interests, and credit insurance) that are intended to support an increased credit line or assure payment from a financially distressed customer.

A credit application also provides the initial and best opportunity to secure a customer’s formal agreement to a trade creditor’s terms and conditions—because the customer is most eager to please the creditor at the inception of the parties’ relationship. The “Ts and Cs” form the core of a creditor’s contractual relationship with its customer. Properly drafted Ts and Cs can help maximize the likelihood of collecting a claim against a delinquent or defaulting customer, while minimizing the creditor’s risk of potential liability to the customer.

The final step of a well-constructed credit application process is execution. It is critical to ensure that a properly authorized person executes the credit application on behalf of corporate or limited liability company customer.

Otherwise, a creditor runs the risk of future litigation over the signatory’s authority to submit the application and bind the customer to the creditor’s terms and conditions. Where the customer is an individual or sole proprietorship, or where the customer is a business entity and the creditor has obtained a personal guaranty, best practice is making sure that the creditor can prove execution in any subsequent litigation, such as arranging for execution in the presence of a notary.

This Model Business Credit Application and Terms and Conditions of Sale is intended to provide a framework to consider when a creditor prepares its own form credit application and terms and conditions. While they are a great initial resource, each creditor-customer relationship is its own, with its own particular facts and circumstances. Therefore, each company should prepare its credit application and terms and conditions, and, where appropriate, negotiate terms and request additional information, on a customer-by-customer basis and consult counsel where appropriate.