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Developing Solid Business Credit Agreements

written by: •edited by: Michele McDonough•updated: 12/12/2010

If your business sells to other businesses, you may want to allow these companies to purchase goods on credit. What should be included in a business credit agreement? What things should you check before allowing businesses to buy on credit?

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    Business to Business Credit

    You may be fortunate enough in your business endeavors to have much repeat business from another business. Sometimes a great selling point on goods or services is the ability for a business to purchase those goods or services on credit. Should you extend credit to another business? If you do, how should you go about it and what should be included in the business credit agreement? Finally, how should you check to make sure the business credit agreement is reasonable? Read on to find out the answers to these questions.

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    Should You Extend Credit to Other Businesses?

    Should you extend credit to another business? People often expect that there will be an option to float credit and pay off accounts on a regular basis rather than all at once - especially if they are a business regularly utilizing the services of another business. Many businesses accept credit cards and other forms of credit. However, you may remember your mother telling you, "Just because everyone else is doing it doesn't mean you should." Given that "everyone's doing it" isn't a good enough reason for you to extend credit to your business clients, what are good reasons?

    1) You have enough of a cash-flow with your business to where you can afford to extend credit to business customers. For example, if you are dependent upon on-time payments and one late payment means that the rent doesn't get paid, do not extend credit at this time.

    2) You regularly work with a business who pays on time. They have a large project with a large fee. Their accounting department is not comfortable with cutting a check that is for $22,000, so you extend credit and allow them to pay in increments.

    3) The business has been around for a while. Nothing is worse than extending credit to a business that goes out of business. Make sure you'll be paid by doing your background research.

    4) The business has a good credit score (more on this in a moment). You want to make sure that the business has a good history of paying their bills on time.

    5) By extending credit to another business, it will increase your business. This relates to item number two. If your fees and projects are sufficiently high, extending credit can help offset this to clients who could not otherwise afford your services or goods.

    Image Courtesy of Sxc.hu/szazesk2

    Read on to the next page for more details on extending business credit as well as what should be included in a business credit agreement.

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    Business to Business Credit - How Much Should You Extend?More hints and tips on establishing business credit agreements - agreements where your company extends credit to other businesses. What terms should your agreement include? How do you protect yourself when extending credit?
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    Business Credit Agreements

    Any time you extend credit to another business, you should draw up a business credit agreement. A business credit agreement is the terms and conditions under which you are extending credit from your business to another business. Here are the things that the credit agreement should contain:

    1. The line of credit extended should be noted. It would be good to extend credit to cover what must be financed. For example, if you are doing a $22,000 project for the business client, they may place a retainer fee of $3,000 down. If you are financing only the amount required to finish the project, the amount financed would be $19,000.
    2. The terms of borrowing the money and repaying the money. How long does the customer have to pay the money back? What happens if they do not pay the money back?
    3. Interest and fees should outlined. How much will your interest rate be? How often will this interest rate be accrued? What sort of fees will be charged? This should all be explicit in your agreement.
    4. Collateral should be assessed and agreed upon.
    The best way to set up a business credit agreement is to consult an attorney and have them set up the agreement for you. By doing this, you can ensure that should the unfortunate event arise that the business you have extended credit to does not pay their bill, you can still collect your money.

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    Checking Your Business Credit Agreement

    When you look over your business credit agreement, you want to make sure that all scenarios have been accounted for. The agreement should specify what happens if your client pays late, doesn't pay for a month, or doesn't pay at all. You should specify the terms of your services. When will they be delivered? Also included should be any collateral. Do you operate a construction company? If so, you may want to include stipulations such as property liens or foreclosure for non-payment.

    While you should make sure that you get paid, make sure your agreement also contains a means for dealing with extenuating circumstances. Is their business performing poorer than expected? If so, is there a process they can go through to make payments that they can afford? While you shouldn't bend over backwards for everybody, if you have a repeat client who has always paid you on time in the past, you will want to make sure that should they hit rough waters, you can work with them.

    The most important thing is to do all the background work before extending credit to other businesses. Make sure that you have all the relevant information - business name, owner name, business license numbers, addresses, bank information, etc. Run that credit check and don't extend credit to businesses with a poor credit rating. Check with other businesses who have extended credit to the client. Check on the financial health of the business. Cover yourself!

    Finally, make sure that both you and the business you extend credit to understand completely the terms of the credit being extended. Have any questions answered before confusion sets in. By making everything explicit, official, and understood, you can protect both yourself and your client in the long run.