Business Credit Questions and Answers

Q. I filed a preliminary lien. The debtor made a payment and subsequently filed for bankruptcy protection. Did I have a security interest and therefore a defense against preference claims, or is the payment recoverable by the debtor in bankruptcy or the trustee?

A. I am not an attorney, so the most I can say is that in my opinion you have a decent argument that the payment that you received was not preferential because you were - in fact - a secured creditor at the time the transfer took place.

Q. I own a business that works for businesses and consumers. I think that on large jobs for consumers that we would get more business if we offered terms. What advice would you give?

A. If you are going to offer credit terms, you will need to assign someone with responsibility for collection. Consider assigning specific numerical targets to your collector. For example, set goals and measure the number of collection calls made each week. Make the same person that has authority for credit approval responsible for collection management. Develop decision rules. For example, if an account is 30 days past due, approval for additional purchases is suspended. If an account goes 60 days past due, the credit limit is to be zeroed out and may only be approved after update and review by the decision maker. Make certain there are tangible rewards for successfully managing the credit and collection process, and specific consequences for failure. Use the federal Fair Debt Collection Practices Act as a guideline for collection of consumer debts. Even though it is intended for third party collection agencies, the rules are easily transferable to your particular situation.

Q. What are your thoughts about software used to automate parts of the credit function?

A. I think automation is the wave of the future for credit departments. Credit scoring software, financial statement analysis programs, decision support systems, deduction management software and collection management software will / have revolutionized the commercial collection management function in companies that have adopted them. This software is fully functional today, but the software will become more of a factor in mid sized and small companies over time – essentially as soon as senior managers becomes aware of its potential and the short time required to recoup their return on investment.

Here is an example: One of my consulting clients is still using a decision support software matrix that I worked with a software manufacturer to set up. It manages the company’s credit decision making / credit approval process 24x7 and essentially without any human oversight. The exceptions are marginal credit risk applicants or unusually large dollar value orders about which they sometimes make decisions independently or ask my advice.

Disclaimer: Nothing on our website is intended as legal advice, or tax or accounting advice. Nothing on this website should be considered an alternative to seeking professional legal or professional advice.  You are encouraged to use your judgment in deciding which of the ideas to accept or adopt, and which to reject and ignore.