During the past eleven years that we have been writing this newsletter, we have often written about and answered inquiries concerning credit agreements vs credit applications and the significance of the credit agreement. It is becoming more apparent that the implementation of a credit agreement either in lieu of the credit application or as a supplement to it will be a major contributing factoring the future if the  credit department is to continue its role in collecting from the buyer within or a reasonable time thereafter. 

Since the establishment of credit, it has always been the seller who determined its’ terms of sale and other conditions by which goods and services were provided to the buyer under credit terms. In many countries, laws have been enacted to protect both the buyer and seller. In the U.S. these laws are contained in Article Two of the Uniform Commercial Code. With respect to specific terms of sale the Code has never been forthcoming and specified a particular term, i.e. 30, 60 90. Rather the Code left the specific term to the seller by simply stating that payment is due upon receipt of goods.  

Over the last ten years the relationship between buyer and seller has evolved to the point that the buyer has begun dictating to the seller the terms under which they will purchase the sellers products. This evolution has not only affected the way business operates today but also the role of the credit department with emphasis on collections. Never before has collections taken a secondary role in the management of a businesses cash flow has it has today. The primary emphasis today is deduction management. And what has changed where we focus more today on deductions rather than collections? 

It used to be that if a buyer had a dispute with a bill or shipment they would simply notify the seller and deduct the amount of the dispute from the invoice and pay the undisputed amount of the invoice when due. This was acceptable because the buyer was protected during the dispute process by laws like the UCC. Once notified of the dispute by the buyer, the seller then had the option of how to handle the dispute and when to resolve it. One law protecting the buyer was that they could not be penalized for those deductions taken for what they believed was a legitimate dispute until the seller resolved the issue and had notified the buyer, in writing, of the outcome of their investigation of the dispute.  

Today, however, the sales agreement has been replaced with the buyers agreement. This agreement states under what terms and conditions the buyer agrees to purchase the sellers goods and is not only different from the sellers sales agreement but also the original laws established under the Uniform Commercial Code and laws of other countries with similar wording that provided terms of sale be established by the seller. Regardless, the buyers’ agreement is a contract and if the seller ships the order referenced in the buyers agreement then the terms established by the buyer are valid and enforceable. The credit department is usually the last to know about the terms whether they be the sellers or buyers but they become ineffective to enforce their credit terms because unlike the sellers agreement they are not incorporated into the buyers agreement.  

There is a difference between a sale and a credit sale. Credit has never been a requirement for a sale. We have, however, over the years combined the two so that many professionals today are unaware of the difference. Credit and the ability to obtain it is not based on who the buyer is, how large the amount of the order, or what the competition is doing or will do. Credit is based on three simple principles. Character, Capacity and Capital.  Character is the equivalent of trust and integrity. Capacity is having the ability to pay and Capital is having the available resources to provide for Capacity.  Credit has its own set of terms that are often different from sales or buyers terms. But unless there is a written credit agreement those terms become subordinate to the purchase agreement.  The terms of the credit agreement include when and where payment is due; how disputes are reported and resolved; information and security; late fees and collection costs; litigation; the treatment of past due balances and future orders; the limits imposed on the amount of credit available to the buyer.  A well run organization will require both a sales and credit agreement of its customers to insure not only the performance of the sales objectives but that the credit department has the tools in place to meet company and department goals.   

I wish you well.  

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.