Draw the Law – Payment Issues, Part II: – Extending Credit and Interest Rate

So it’s holiday time, and we have survived Black Friday and Cyber Monday, but we still want to generate more sales. Even though cash is king, you still want as any customers buying your stuff, so you accept checks and credit cards.

Extending credit is always a question of cash versus generating more sales.

Direct Credit Extension to Consumers

However, what about those big-ticket items? Do you limit your market size by saying cash only ? Or do you try and expand by offering direct credit to customers? While, this does increase sales, and the financing charges can actually be a source of health income this is not a process you do overnight and it is not without consequence.

Consider Some of the Following Issues:

  1. regulations (cap on interest rate, Truth in Lending Act, Equal Credit Opportunity Act);
  2. time and costs for developing a credit policy and the review process of your questionnaires and forms you plan to use on customers;
  3. length of time to collect, which means need for great reserve funds to cover the goods and services sold on credit;
  4. you will have to consider debt collection when customers can’t pay;
  5. and finally, related to the prior point, some of the bad debt will never be collected and be written off.

Things to consider when extending credit: (1) regulation; (2) time and money for the process; (3) delayed payment; (4) debt collection; and (5) writing off some of that debt.

That being said the major benefit is we do a lot of transactions nowadays on line of credit, so it makes sense for a growing business to offer alternate payment methods to tap new markets. So for the average customer it looks like this:

  1. they go to your store;
  2. they see something in your store they cannot pay for in total right now;
  3. your salesperson understands this and says we have a direct credit plan;
  4. customer is interested;
  5. salesperson gives them the credit application;
  6. internally or externally you run a credit check based on the information given; and
  7. you decided, based on results, whether to extend credit or not.

For the customer, all they know is that they want somethign and that you are willing to "sell" it to them on credit rather than cash, but you have whole process in place to deal with their application.

However, even before that all happens, you the business owner engage in a calculated risk to figure out if this is worthwhile to even offer credit and at what interest rate?

Interest Rate Caps and Federal Laws

So most states regulate the interest rate a business can charge for credit for consumers. However, in many states, the B2B interest rate is unregulated for the granting of credit. Basically, it is up to your negotiating skills when it comes to extending credit to your business customer. The interest rate is generally capped in most states in consumer credit situations in an effort to protect consumers from high interest fees. So it is best to consult with an attorney about local rules. Once you consider the state laws, you will then have to comply with federal law, the two being: (1) Truth in Lending Act (TILA), which is aimed at helping consumers find the best rate and credit provisions; and (2) the Equal Credit Opportunity Act (ECOA), which has the goal of preventing discrimination in credit extensions.

Next week I’ll talk about setting up the credit policy and application, and then cover the federal law TILA.

The following week, I will discuss ECOA and as a Christmas bonus, I will also do a brief rundown on you business owners that max your own personal credit cards to run your business and where you stand in the land of credit.

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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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One thought on “Draw the Law – Payment Issues, Part II: – Extending Credit and Interest Rate

  1. Pingback: Draw the Law – Payment Issues, Part III: Credit Policy and Application and TILA | The Blawg of Ryan K. Hew, Attorney At Law

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