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Biz Tips — Vendor Credit Applications

Updated: Jul 13, 2022

Many small businesses fail and when asked what contributed to the business failure, business owners cite lack of management experience or expertise as a prominent reason for the failure of their business.  Even the greatest business idea can get choked by an entrepreneur’s inexperience in business management fundamentals.  There are countless traps for the unwary and one of them involves vendor credit applications.

Here’s a real-life scenario.  Construction company needs to order materials and supplies for customer jobs from a new vendor.  The vendor is more than happy to sell the materials and accept payment after the materials ship.  However, the contractor needs to sign the vendor’s credit application first.  When the credit app comes in over the fax or email, the business owner does not see it — he or she is out doing business, managing jobs and dealing with customers.  Frequently the “paperwork”, and credit applications fall into that category, are left to someone in the office such as a secretary, bookkeeper or someone else without any ability to understand the significance of the terms in the credit application. They usually do not read the fine print and give it to the business owner or to read or sign. The contractor is busy with other things and needs the materials quickly in order to keep the jobs moving along smoothly without interruption so the application gets signed and returned to the vendor without any meaningful review or understanding of what was just signed.  Does any of this sound familiar?

Be assured that the vendor knows exactly what is in the credit application.  That application probably has one or more of the following terms that are not in the business owner’s favor:

  1. The business owner personally guarantees any amounts owed to the vendor;

  2. Unpaid balances bear interest at a rate of 18% or higher;

  3. In the event the vendor needs to collect on the debt, the business owner agrees to pay the vendor’s attorney fees and collection costs;

  4. In the event of a lawsuit about the materials or the unpaid bill, the business owner agrees that the suit will be filed in the vendor’s state and county — usually a long way away from the business owner’s place of business;

  5. A limitation on the time period within which the contractor can file a dispute against the vendor.

If the vendor’s bill is paid in a timely fashion there’s no problem.  But sometimes the bill is not paid for a variety of reasons, including a problem with the materials, the owner’s customer does not pay timely or the contractor simply is short on cash flow.  If the vendor files suit, the contractor will immediately start to lose money by having to take time to respond to the suit (assuming it does not get lost in the usual “office shuffle”), incur costs to retain an attorney (often in a different state), suffer damage to its credit rating and other issues.

These problems should be avoided.  It takes a little time to read and negotiate credit applications but in the long run it will save your business money.  It only takes one lawsuit filed by a creditor to cost you thousands of dollars in dealing with the problem.  The vendor might be so anxious to get your business, they don’t give you any problems with your suggested changes.  Often you can accomplish those by crossing out the offending provisions of the application (initial where you make those changes), sign it, make a copy for your files (and keep the copy!) and send it back.  The vendor may not even notice the changes until too late.

Our business team at Fiffik Law Group includes Michael E. Fiffik, Esquire, and Matthew Bole, Esquire.  We can review your contract management process and give you tips that you can apply repeatedly to your contracts that will help your business be profitable.  Please call us at (412) 391-1014.


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