An essential part of managing the costs and risks of running a business is the ability to get goods and services on credit. Signing a credit application is a standard part of getting credit from a customer or business partner. However, depending on the terms of the application, your business can face hidden risks. This article will guide you through the fine print, explaining:

  • what signing a credit application involves; and 
  • the key terms you need to know. 

How Does a Credit Application Work? 

When goods or services are supplied on credit, payment is deferred for a period of time. This is because credit works as an interest-free loan for your business. As long as you make your payments on time, a credit card application can work in your favour. A credit application is a standard agreement you sign with another business to receive goods or services on credit. This agreement will include:

  • payment terms; and 
  • any other additional terms of the agreement, such as the penalties you will face if a default occurs. 

The business receiving your credit application may reject your application if it believes there is too great a risk of you not paying debts owed. Regardless, once you sign a credit application, you are legally bound by its terms. Therefore, you will be asked to provide extensive details about your business when you complete the application, including:

  • all contact names and details; and 
  • trade references from other customers.

Get Your Details Right

It is important to get the basic details of your business right when completing a credit application. Many business owners are unaware of the legal entity that is operating their business. This often results in incorrect information on a credit application.

Whether your business is operated by an individual, a company or via a trust, it is important to cover this accurately on a credit application. 

Check Your Credit History

Most businesses will obtain a credit report on your business when they are assessing any credit application. This will provide them with full insight into your company’s financial status and payment history. Before you sign a credit application, you should be aware of your company’s credit rating and address any issues that you may have missed, such as an outstanding utility bill. If you do not, you may be refused credit if your company’s credit rating shows any issues.

Key Terms in a Credit Application 

You should be familiar with the following key terms and how they work as they are included in most credit applications:  

 

Payment Terms

These will vary depending on other business’ needs and cash flow requirements. Standard terms require payment within 7, 21 or 28 days.

Director’s guarantee

Many credit applications require a director of the company to guarantee any payments owed by the company. This means if you are a director, you are personally liable if your company cannot afford to pay its bills. Your personal assets can be at risk. At worst, you may face bankruptcy if you or the company are unable to pay the debts. Most director’s guarantees are continuing and unlimited, which means you remain liable for the company’s debts even if you stop being the director of the company or if the company stops operating.

Default terms

These terms set out what will happen if you miss any repayments you owe under the credit application. It is important to check these carefully as they can include extras, such as high interest rates charged on outstanding payments.

Caveatable interest

This term gives the other company the right to lodge a caveat over any property owned by you or the company that is a party to the credit application agreement. This may mean you cannot sell a property until any outstanding debts are paid.

PPSR

The credit application may allow the company providing credit for any goods and services to register an interest on the Personal Property and Securities Register (PPSR) for those goods. This will mean they can repossess those goods if you default on payments.

 

Key Takeaways

Signing up to get goods or services on credit can be an efficient way to operate your business. Credit agreements can act as interest-free loans to help you manage business planning and cash flow. However, when you sign a credit application, you are entering a contract with the business providing credit. It is essential that you are aware of the payments and other terms and any penalties you might face if you miss a payment. If you have any questions about credit applications or need assistance with a dispute relating to a credit application, call LegalVision’s commercial and business lawyers on 1300 544 755 or fill out the form on this page.  

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

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Jodie Thomson
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