Draw the Law, Payment Issues I: Accepting Credit

Following in the vein of making agreements with customers or clients, and then warranting or disclaiming your products and/or services we come upon one the most important parts to your business, how do I get paid?

Obviously, in a tight economy cash is king, and having cash today as opposed tomorrow is princely. However, nowadays in the world of plastic and convenience many businesses accept some sort of credit payment.

Today I am going to focus on just the idea of accepting credit, but before we get to that let’s set-up a general framework for thinking about credit.

What is it Credit?

Credit is a payment option other than cash upfront. It includes like I said credit cards, promissory notes, and checks.

There is cash, and then there is everything else from checks, credit cards, and payment contracts.

Who would I Accept Credit Payment From?

This is really up to you, and you should consider some sort of internal payment policy that handles cash payments, credit payments, extension of credit and debt collection, etc . . . based on the trade or industry you are in. That being said there are two groups of people to think about in the credit situation, your consumers and then your commercial clients.

Businesses can choose to accept credit from its consumers as well as it bigger commercial clients, the methods though may vary.

Clearly, the former has a variety of payment options and their transactions tend to be smaller and quicker with you whereas the latter, due to their involvement with you may require a more formal type of payment system. In the commercial case, consider the size of payment owed to you and frequency of good and/or services flowing from you to them. They may not have cash on hand to pay on receipt of the goods and/or services from you because they in turn need to finalize it to someone else further down stream.

What are the Types of Credit and Some Concerns Accepting Them?

  • Indirect Credit – is you will receive payment indirectly from the customer/client through a 3rd party, such as a bank with checks or an issuing credit card company through its cards.
    • Checks – you will have worry about fraud and insufficient funds situation, in addition be wary of “Paid in full” on the check, as that may be legally binding.
    • Credit Cards – you are playing on the terms of the credit card service, so always check what the fees and policies are, as you might have to past those cost onto your customers if they eat too into your profit. PayPal operates similarly, as it deducts fees when you take the money from your PayPal account and get a check or deposit into your tied in bank account.

The customer pays with check or charge, the information is sent to the indirect party by the business for the money due to customer's purchase. The amount is either deducted from their account (bank) or a bill (credit card company) is sent later.

  • Direct Credit – this is where you would extend credit directly from yourself to the customer, and is easily seen in the situation of appliance or electronic stores for big-ticket items. This can certainly increase sales, and the financing charges can become and additional source of revenue. However, realize you expose your business to several laws, namely the Truth in Lending Act, the Equal Credit Opportunity Act, FTC Credit Practices Rule, and the Fair Credit Reporting Act (as well as any other applicable state laws).
  • Other Credit Types – commercial credit (B2B situations), contracts, and promissory notes all provide more formal and long term arranges to accept payment. However, more formal means longer processing times, review processes, and even the help of legal counsel to negotiate and reduce the terms in writing. However, having a formally pay system in place probably means a sustainable cash flow and good business relations with the other business for the long term.

Policy and Planning

If you choose to extend credit to a customer you have a lot of internal paperwork to do. Then someone should check if that is in compliance with the law.

What does your financial plan call for? Do you want more sales? Then you might want to have a robust credit acceptance policy, but you should be aware you will not be able to get all that credit (and will need to go to debt collection), plus there are administrative costs and legal oversight to worry about.  While cash is the safest form of payment it sometimes is unlikely in this day and age to have it be your sole payment system for many types of businesses. The existence of many smartphone apps to accept credit cards and use of systems like Paypal may certainly provide ways for businesses to avoid the higher cost of merchant fees on traditional credit cards. The bottom line is that accepting credit does requiring some planning and foresight.

In the following weeks, I will take a look at some of the legal concerns with extending credit, contract law issues (also be covering Boilerplate Blurb), and debt collection.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

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