Effective Credit Management – Part 2

Terms and Conditions of Trade

A credit application and terms of trade form the basis of your relationship with customers. They establish the rules of the game and if a problem occurs with the relationship, you want to rely on these documents to resolve the issue.

Just like a prenuptial agreement, when the relationship is travelling smoothly, you don’t give it a second thought, but if things go awry, it’s the document you reach for to check your options.

A well drafted credit application and terms of trade will pay big dividends over many years by removing any uncertainty about what was agreed between you and your customer. AMPAC regularly relies on these documents when chasing overdue debts and sometimes we find they are lacking in protection.

Below are a few clauses which can help you recover overdue accounts and reduce the associated costs.

Effective Credit Management

Compare the clauses listed below against your current credit documents to identify where you could benefit from a small investment which will pay you back many times over. 

A cost recovery clause lets you recover most of your collection costs including collection agency commission, thereby reducing the overall cost of recovering your debt. In most cases your collection agency will automatically add all recovery costs to a debt and often you will recover not only the amount owing, but also most of your recovery costs.

Do your terms contain a Cost Recovery Clause?

This allows the charging of an agreed amount of interest from the date the debt was due for payment. This is a real incentive for a customer to pay. It also provides a powerful negotiating tool to bring about a settlement.

Do your terms contain an Interest Clause?

Where organisations trade nationally, their terms and conditions should specify the state and the law to be used to determine a dispute. For example, if you are located in NSW, then the matter is heard in NSW, using NSW law. Predetermining where a matter will be heard and which law will be applied can save a lot of time and inconvenience.

Do your terms establish jurisdiction?

If you supply goods, and want to retain ownership until paid, then this applies to you. The Personal Property Securities Act 2009 (PPSA) was introduced in 2012 and allows a supplier of goods (not services) to register their Security Interest in the property, goods or equipment. Businesses need to consider whether registration of a security interest is appropriate in their circumstances, and if so, update their documentation to secure ownership.

Have you considered PPSA in relation to your business?

Successful litigation is of no use if the debtor has no assets. If the debtor is a company, often assets will be secured by a financier, so wherever possible it is important to have the company directors guarantee payment of your debt. A good Guarantee will also contain a charging clause which allows you to lodge a caveat over property owned by the guarantor.

Do your terms contain a Personal Guarantee?

Over time, you may need to vary certain terms in your agreement. This could result from a change in legislation a new product or market opportunity, or perhaps an acquisition of, or the sale of a part of your business.

Does your documentation allow you to vary the way you do business and your terms of business?

When granting credit, it is important to have confidence that the information provided is correct. If later, the information is found to be inaccurate, you may gain a tactical advantage in any subsequent legal proceeding.

Do you require your customer to warrant their information?

Where the customer is a trustee of a trust, it is likely that it has no assets, and all the assets are held in the trust. It is therefore important to bind the debtor in its capacity as trustee of a trust.

Is your position secure when dealing with trusts?

You can’t contract out of warranties implied by the various Trade Practices Acts however, you can limit liability in the event that you breach the terms of your supply contract. For example, in the case of faulty goods, suppliers often limit their liability to either the repair or replacement of the goods or services.

Do your terms limit your liability?

These are just a few things to consider, and should be part of your ongoing credit risk management which costs little, but returns lots.

Mark Logue is a debt collection specialist and the joint managing director of AMPAC Debt Recovery. He has more than 30 years’ experience in the debt recovery and credit reporting sector, covering all segments of industry and commerce throughout Australia and overseas.

Mark can be contacted by phone on 0409 749 709 or by email at m.logue@4ampac.com.au

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