Running head: COMMERCIAL CREDIT

Commercial Credit

Legal Environment of Management

Commercial Credit
Exchanging services and/or goods in exchange for the promise of future payment has been in existence for centuries. Loans were made as early as 1300 B. C. as securities for mortgages and advance deposits. The first use of open credit in America can be traced back to 1620 with the establishment of the first permanent colony in New England.
The Pilgrims spent three years negotiating with England to raise funds for their journey. Soon, a wealthy London merchant struck a deal with the Pilgrims to fund their trip by lending them 1800 British pounds, which today would be equivalent of 2400 US dollars. The terms of this agreement were that all credit advanced and to be advanced would be paid in exchange for the Pilgrims to work for a term of seven years. At the end of the seven year term, payment in full would be made to the merchant, also known as a creditor, based on the size of the initial investment.
At end of the seven year period the Pilgrims were unable to settle their debt in full with the England merchant. An alternate agreement was made in which the Pilgrims were required to pay 200 British pounds per year for a term of nine years until paid in full. Unfortunately this arrangement failed as well and was renegotiated. Finally after twenty-five years, the final payment was made to settle the debt in full. The history of this transaction is noted as the first example of credit in early American credit.
Throughout the years, several transactions were made that used a form of credit such as the financing of the American Revolution by Congress making efforts to finance the Army of the United Colonies. Congress had three options: 1.) borrow money from sympathetic countries abroad, which was a problem since the credit world stood at zero for the Colonists; 2.) impose taxes, which was not poplar since it was the primary cause for the American Revolution; or 3.) issue bills of credit.
Years following the American Revolution, the Treaty of Paris was signed bring the war to an end. The ending resumed trading in which American importers and wholesalers extended generous terms to their customers. Terms of sales were typically twelve months, but they also offered six to nine month terms. Generally a customer’s account would go up to twenty- four months unpaid, which caused credit references to assume a high level of importance. This lends true to today’s economy when trade credit is used.
Business or trade credit has been on the United States business scene for hundreds of years. Credit is used for the purchase of goods or services and continues to be a very important source of funds for firms. Credit allows more flexibility and financing for businesses than commercial borrowing or corporate bond financing. If business credit was not available the economic system as we know it would be none existent.
Businesses offer credit terms to customer to accommodate the sale of goods and services as a primary source to create revenue. Businesses offer credit for various reasons such as increasing sales, competition, promotional offers, convenience, and pricing just to name a few. When credit is extended to buyers it involves a trade between inventory holding and the holding of accounts receivable.
Businesses use attractive and special offer credit terms to match competitors and offering promotional products. Trade credit is one of the most convenient ways of purchasing hundreds of items and making one single payment. Also, sales volumes can be affected greatly based on the sales price and the credit granting decisions being made on a product.
Although there are great benefits to businesses offering credit terms to its customer, there are several other important elements to consider when extending credit terms such as, timing, risk of non-payment, security, and legal aspects.
When credit is extended to customers, business must wait for payment to be received which creates risk of losing funds tied up in financing or carrying the financing for a late or past-due customer. Businesses also take a risk of the customer not paying at all. Some business chose to ask the seller for collateral when entering into a credit agreement as a means to secure its assets until the agreement is paid in full. Laws have been put in place on both federal and state levels that will affect both businesses and the customer in which the credit terms were extended to.
In 1986, President Lyndon John signed into law The Truth in Lending Act (TILA) (15 U.S.C. § 1601). This was to protect and educate customers when purchasing items with the extension of credit. Johnson wanted customers to have a right to determine whether or not they were receiving a good deal for the item being purchased. Customers were to clearly understand the use of credit in the purchasing of a product allow the customer to shop for better terms is necessary with no adverse implications.
In 1977, The Fair Debt Collection Practices Act (FDCPA), (15 U.S.C §§ 1692-1692o), was pass and become effective March 23rd, 1978. This act was created to protect a consumer in the event of a creditor attempting to recover a debt. The act is intended for the protection of those with “consumer” debts, which are considered to be items purchased for personal, family, and household use. According to the Federal Trade Commission, the FDCPA has set the standard for all trade practices conducted by creditors whether consumer or commercial. Also, in Section 5 of the Federal Trade Commission Act of 1914 (15 U.S.C §§ 41-58), creditors as well as collectors of commercial debts may be pursued for any conduct violations of the FDCPA, even though commercial businesses are exempt from FDCPA itself.
In today’s economic decline, businesses are taking a little more precaution when extending credit to customers. For example, although the oil and gas industry may appear to be thriving and overcoming the current economic adversities, there are many businesses involved in this industry that are not do so well.
As an Accounts Receivable Manager in the oil and gas industry today, it is important to make sound decisions when extending credit to businesses. Due to the decisions being made to extend credit to a customer directly impacts the outcome of a company’s financial fate is very important to focus on the how the decision aligns with the company goals.
In an industry that is as competitive as oil and gas, it is important to make the development of sales an optimal level. This is achieved by making sure that the customers are receiving all of the pertinent information in order to accept the offer of a credit agreement.
A new customer must be willing to complete a credit application to establish a clear acceptance of responsibility as well as acknowledging the expectation of the business offering the credit terms. A customer should also clearly understand the terms of sale according to the minimum industry standards. Communication of the sale must be clear both internally and to customers, which requires approvals from both parties if modifications are necessary. Credit investigations are performed based on the trade references given by the customer. These are businesses that have extended credit to the customer in the past or currently that can attest to the credit worthiness of the customer.
By taking precautions up front with a customer when investing their credit worthiness helps the business to take minimum risk when extending credit. This intern keeps the collection of accounts receivable very minimal. Some customers who have outstanding credit ratings may often be offered a cash discount with my company. The customer is given a discount on payment as incentive of payment before the terms of the agreement expire.
There are also exceptions to the credit policy when a more lenient decision is made to extend credit to a customer that may not have an excellent credit rating. These customers are generally asked for collateral. The customer may also be asked to make a payment in the form of cash in advance for the entire order. This type of term may also be viewed as a form of pre-payment in our business.
There are times when a great customer has something unexpected to happen that may cause them to become past due.
It is normal practice in this business for a customer that is past due to be subject to letters of demand or possibly a phone call inquiry in regards to the past due debt. As stated previous, although collection of a business debt is not mentioned to be covered in the law of FDCPA, it is just as important for the guidelines to be followed.
While my company has a very strict analysis of credit risk, it is the goal to offer credit when possible to customer. The issuance of credit for the purchase of our product is how we generate our monthly revenue.
Discussing customer’s account status is a daily task as a manager, although it does not always have to be a discussion of debts that are past due. There are customers who inquire about discounts or special terms that were not offered as agreed. It is important as a manager to be prepared with all facts aligned with the account. Discussing an account with a customer can really set the tone for the collection of a debt whether it is past due or not.
While as a manager of credit and collections for the company, I am responsible for the enforcement of payment terms, credit terms, and cash forecasting. I am required to represent the business according to the laws and standards set forth on both a federal and state level. It is important to understand the implications of failure to comply with these laws. Violation can not only affect your business but myself as an employee as a direct representative of the business.

References
Brittain, M. (2009). Principles of business credit. (6th ed.). Columbia, MD: National Association of Credit Management.

CHANG, C. (2012). TRADE CREDIT. Secured Lender, 68(10), 28-30.

Cole, R. H., Savage, J. K., & Lazer, W. (1958). 8. FINANCING. Journal Of Marketing, 22(4), 425-426.

Grablowsky, B. J. (1976). MISMANAGEMENT OF ACCOUNTS RECEIVABLE BY SMALL BUSINESSES. Journal Of Small Business Management, 14(4), 23-28.

Hughes, A. (2011). 7 Ways to Avoid a Cash Flow Crunch. Black Enterprise, 42(2), 38.