Knowing Your Customer and Lending Accordingly
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What does your credit lending process look like?
Why is it important to know your customer in detail?
When you extend credit, the type of legal entity you’re extending credit to is key to determining how much credit to grant. From a collection standpoint, there’s a huge difference between lending to an individual, sole proprietorship, corporation, or limited liability company. Many business entities, including corporations, provide a significant shield against collections, allowing their owners or shareholders to avoid any personal responsibility for their unpaid debts.
Before extending credit, you should know what type of legal “entity” your customer has chosen. Identifying your customer is just as important as knowing how long the customer has been in business, how much credit they’re requesting, who they’re purchasing from (“trade references”), and who they’re banking with. Generally speaking, with the notable exception of sole proprietorships (where the business and owner are one and the same), a legal entity may:
- Have separate assets owned in its name
- Sue and be sued in its own entity name
- Insulate its owners from personal liability (except for the general partners of a regular or limited partnership)
Find out the differences in the legal entities you’re selling to so you avoid any misunderstandings as to who owes you the payment. Then make sure you’re extending credit to an entity you actually want to have credit terms.
When you evaluate credit applicants, always require a formal credit application. The information your customer provides on its application makes it clear who the applicant is and the nature of the legal entity involved, which, along with other vital information from the credit application, allows you to properly evaluate the prospect. If the customer refuses to take the time to fill out your credit application from, your credit policy should require you or your designee to contact the customer by phone or in person to obtain that information. You can complete the application form yourself and then have the customer verify, sign, and return the form or acknowledge its accuracy in writing. Even an email acknowledgement is fine.
Learn More with Michigan Collection Services
Don’t be afraid to talk to a collections lawyer! The Muller Law Firm can answer questions about any part of the collections process. If you need help with debt collections located in Michigan, call (248) 645-2440 or submit a contact form here.