Are You a Legal Professional?

Extending Credit - Overview

Extending credit to your customers or business partners helps your business increase sales and provide additional sources of revenue. However, there are downsides to extending credit as well, such as having to comply with a variety of federal and state laws, and of the course the possibility of not being able to collect. This article provides some basic introductory information on extending credit to your business's customers.

ID for Credit Transactions

Any business that accepts debit or credit cards for payment should understand the PCI security standards intended to protect consumers, credit card companies, banks, and businesses from fraud and security breaches. Any business that is going to accept credit or debit cards should obtain a complete list of the requirements from the PCI Security Standards Council.

Some states have strict regulations pertaining to the kind of information that customers can be asked for when purchasing items with credit cards. Very often, businesses can't require customers to give information that is personally identifying other than an address or phone number. Exceptions may apply if the bank issuing the credit card requires the information, or if the information is essential to fulfilling the transaction, such as for delivery or servicing. If you would like more information about the laws in your state, you can visit your state's Attorney General Website.

Consumer Credit Laws

If your business extends credit to customers, you should become aware of consumer credit laws, which regulate many aspects of your interaction with customers. For example, if your business is extending credit, you will have to comply with rules regarding how you advertise interest rates and how much time you have to respond to claims of billing mistakes. There are also certain rules about how aggressive you can be when trying to collect a debt. It's important to be in compliance with federal and state consumer credit laws, so it's definitely in your best interest to find out the laws that will be applicable to your business.

Extending Credit and Getting Paid

If you decide to extend credit to your customers, make sure you establish credit practices that are:

  1. Fair enough to your customers under state and federal credit laws, and
  2. Strict enough to ensure that your business will get paid.

You should have credit policy and a set procedure in place that your business will follow if customers don't pay when they are supposed to pay. Examples of what you can include in your collection procedures are sending out overdue notices, demand letters, and collection notices.

Mechanics' Liens

Mechanics' and contractors' liens exist in most states to provide special collection rights to those who provide services or building materials used to improve property. A contractor's lien is often referred to as a mechanic's lien or a construction lien, and is available to contractors, subcontractors, and suppliers of materials. In some states, certain professions such as engineers, surveyors, and architects may also be eligible to file a lien for services that were provided in the course of a home improvement project. In the event that a debt is not paid, the lien can be foreclosed, and the property sold to pay the obligation.

Your Customer's Bankruptcy

It's important to know that the debtor has the benefit of an "automatic stay" immediately upon filing a bankruptcy petition. This stops you from taking any further action to try to collect the debt owed to your business unless (or until) the bankruptcy court decides to the contrary.

Getting Legal Help

If you're interested in extending credit to customers and/or business partners, it may be a good idea to contact a local business and commercial attorney to create a procedure for extending credit to both safeguard your business and comply with all applicable laws.

For more information and resources related to this topic, please visit FindLaw's section on Business Finances.

Next Steps
Contact a qualified business attorney to help you
address the finances vital to your business.
(e.g., Chicago, IL or 60611)

Help Me Find a Do-It-Yourself Solution