Credit Applications and Guaranties

Starting a Business Relationship the Right Way
By: Andrew C. Voorhees, Weltman, Weinberg & Reis Co., LPA

If your business deals in goods and services, a practical way to conduct business with your customers is to allow them to establish lines of credit and/or running accounts. Invariably, these arrangements are entered into with the very best of intentions. However, there are some actions your business can take at the very beginning of the relationship that can provide protection in the event the relationship goes bad.

At the beginning of the business relationship, it is advisable to have your customer fill out and sign a credit/account application. A credit/account application can provide you with all relevant information about your customer, while also providing asset information should collection of the account become a necessity. Moreover, a credit application has the force and effect of a written contract that is enforceable by the court.

The application should include a request for all basic information from your customer. This includes the business address, telephone number, fax number, email, and tax identification number (or social security number if your customer is an individual). If your new customer is a business entity, it is important to know its corporate status (corporation, Limited Liability Company, sole proprietorship, etc.). The application should also request the names and contact information for all owners/officers of the business.

It is important for the application to include the names, titles, and contact information for every employee of your customer that is authorized to order goods and/or incur charges on the account/credit line. A common dispute when an account or credit line goes unpaid is that the charges were incurred by an employee that was not authorized to do so. Identifying the individuals authorized to utilize the account eliminates this possible defense should legal action be required, while also lessening the possibility of unauthorized charges.

It is also useful to request a list of bank references in the application. This information allows you the ability to verify how your customer conducts business with other institutions, while also allowing you a possible avenue for collection should legal action be required to collect the debt. If you are able to obtain a judgment on an unpaid account, the banking information on the application is a good first step in utilizing bank garnishments to help you collect.

Many credit applications also include additional written terms and conditions. These additional terms may include the frequency of invoices, the address to where payments must be sent, the venue where any legal actions must be filed, as well as business specific provisions. The terms and conditions may also include more potentially contentious items, including the interest rate on unpaid balances, automatic renewal provisions, credit limit, and early termination fees.

In order to ensure that the provisions contained in the terms and conditions are enforced by the court, there must be proof that your customer agreed to the provisions. “When the terms of the contract are unambiguous and clear on their face, the court does not need to go beyond the plain language of the contract to determine the rights and obligations of the parties and the court must give effect to the contract’s express terms.” DiGioia Bros. Excavating, Inc. v. Cleveland Dept. of Pub. Util., Div. of Water (1999), 135 Ohio App.3d 436, 734 N.E.2d 438. It is generally presumed that the intent of the parties to a contract resides in the language they choose to employ in the agreement. Shifrin v. Forest City Enterprises (1992), 64 Ohio St.3d 635, 1992 Ohio 28, 597 N.E.2d 499.

While some credit applications include language that a signature on the application is confirmation that the customer has read the terms and conditions, this language may not be strong enough to be enforced by the court. As such, I recommend including a space for your customer to affix a signature (or at least signed initials) on each page of the terms and conditions (if multiple pages), and that the terms and conditions are attached in some way to the credit application. Taking these extra measures can eliminate any allegations that your customer did not receive nor had an opportunity to review the additional terms and conditions and ensure the court enforces them. The signature on the terms and conditions can remove any ambiguity surrounding the transaction, and leave the court little to interpret in enforcing its provisions.

Obviously, you need the authorized signature of your new customer on the credit application. However, it is also advisable to get an individual guaranty as part of the credit application. While your new customer may be reluctant to have an individual personally guarantee any unpaid amounts, it provides much more security for you.

Personal guaranties must be in writing and signed by the party to be charged. Ohio Revised Code Sec. 1335.05. As such, it is imperative that the guarantee be clearly defined in the credit application. The signature of the guarantor should also be affixed directly below the guarantee provision. The signature on the guarantee should state “individually” or “personally,” and your customer should not be permitted to sign using his corporate title for the business. Above all, the language of the guaranty must be clear and unambiguous that your customer is personally guaranteeing the debt, or otherwise it may not be enforceable.

The tips listed above are just a brief overview of the items that can be included in a credit application. The parties to a business transaction are generally able to agree to terms as they see fit. However, by including the items listed above, in a specific and detailed manner, you can be more secure in recovering unpaid debts due if the relationship goes bad.

About Andrew C. Voorhees
Andrew C. Voorhees practices in Commercial Collections, with a focus on the Commercial Banking, Commercial Business, Commercial Loan & Litigation and Special Collections Groups. He is based in the Cleveland office. Andrew earned a B.A. in Communications from the University of Akron in 2001 and a J.D. cum laude from the University of Akron School of Law in 2004.  A member of the Ohio State and Akron Bar Associations, Andrew is licensed in Ohio. He was selected for inclusion in Ohio Rising Stars (2012-2015).