Developing Solid Business Credit Agreements (Page 2 of 2)

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.

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.