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Credit & Debt Collection: Forms and Contracts

As a small business, you may need to extend credit -- and by extension, be prepared to collect on unpaid debts -- in order to prosper and grow. Even simply accepting checks or credit cards can present a risk of nonpayment (a bounced check or fraudulent card, for example) and might be considered a form of credit extension since you would need to take action in order to collect. When offering credit to customers or attempting to collect on unpaid debts, you will encounter a variety of letters, legal forms, and contracts.

The following article focuses on these various credit and debt collection forms and contracts, with explanations and examples. See FindLaw's Accounting Forms and Contracts and Business Accounting sections for related articles and resources.

Extending Credit

Whether you accept credit cards, personal checks, or offer specialized credit terms, you will want to have policies in place before such options are extended. If you accept credit cards, you may want to set a minimum purchase price, since you will have to pay a fee for each transaction. If you decide to also accept personal checks, you may want to post sign near the cash register explaining that you intend to charge a given fee to customers whose checks "bounce" (meaning they are returned to the merchant unpaid).

If you offer credit directly to consumers, whether it's a company credit card or some other arrangement, you'll want to make sure you verify the applicant's creditworthiness and clearly explain the terms. Keep in mind that invoicing a customer for services or products already delivered is in effect an extension of credit.

Credit Application Forms: What to Include

In addition to the usual, "boilerplate" information such as name, address, and other contact information, credit applications should also contain the following:

  • Social Security Number and date of birth (required for a credit check)
  • Current employer, household income
  • Bank information
  • Co-signer (if necessary)

Credit Contract Disclosures

When extending credit, you will need to disclose the terms of the credit (and repayment of debts) in accordance with the Credit Practices Rule (Federal Trade Commission), as well as other state and federal credit laws. If there is a cosigner to the debt, you'll want to provide a notice such as this: "Notice to cosigner: You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility."

Before signing the contract, often done at the application stage, the customer must be aware of the following terms (at a minimum):

  • Annual percentage rate for purchases (and whether it's variable or fixed)
  • How to avoid paying interest (i.e. how much time you have after the close of each billing cycle to pay your balance)
  • Minimum interest charge
  • A brief message informing the applicant that they can learn more about their rights by contacting the Consumer Financial Protection Bureau
  • Penalty fees (late payments, returned payments)
  • Billing rights (state and federal)
  • Detailed list of terms and conditions of the particular credit offer

Debt Collection

If you extend credit, it's safe to assume that you will probably need to take action to collect on a past due account at some point. But be sure you understand the Fair Debt Collection Practices Act (FTC) before sending out demand letters or calling your customers. For example, you may not make threats, make false claims, or otherwise harass a customer over an unpaid debt.

Debt Collection Letters: What to Include

Remember that your ultimate goal is to collect debt on past due accounts while maintaining positive customer relations and, of course, complying with the law. Your first step should be to write a debt collection letter to the customer, making sure it's congenial in tone and allows for the possibility that payment may already be in the mail. Language may include the following:

  • "This is a friendly reminder that payment of X was due on Y."
  • "If you have already sent us your payment, then kindly disregard this letter."

The follow-up letter should be more firm:

  • "This is our second reminder that payment..."
  • "We value your business and hope to keep you as a customer, but we require payment according to the terms of our invoices."

Finally, the third letter should draw a line in the sand (keep it professional, but firm):

  • "This is our final reminder that payment..."
  • "If we do not receive payment in full by X, then we will submit your account for collection."

Need Help with Credit and Debt Collection? Contact an Attorney

Running a business is quite complicated and often requires owners to wear many different hats, but sometimes it's helpful to hire an attorney. If you are having difficulty collecting on a customer's past balance, it could negatively impact your business. Consider finding a small business attorney in your area for professional help.

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