Opinion: How to Grant Credit Safely

This Opinion piece appears in the Feb. 24 print edition of Transport Topics. Click here to subscribe today.

By Michael Kelley

President and General Counsel

Logistical Recovery Systems

Transportation margins are shrinking, and the stress of generating revenue for your trucking organization is relentless. Your competitors are in the same bind, but some have tossed caution aside and are granting credit to clients who are less than creditworthy.

So, do you stick with business as usual, erring on the side of credit-granting caution? Or do you lace up your skates and follow your competitors out onto the thin ice?

With memories of the Great Recession all too fresh, the idea of saying “no” to any promise of payment, no matter how unlikely, may seem insane. But if you are determined to take chances in hope of reward, at least stop long enough to adopt some simple safeguards to keep you and your truck fleet from falling through the ice.

I’m of the mind that the cliché, an ounce of prevention being worth a pound of cure, absolutely applies to transportation accounts receivable. But if you are determined to take chances, please consider tightening your credit application to avoid many of the issues that can occur downstream and leave your valuable cash assets uncollected.

Creating an ironclad credit application can be done through a number of measures, but the four I consider most useful and dependable are:

• Credit card authorizations.

• Allowing for the recovery of interest charges and the cost of collections. 

• Favorable credit venue provisions.

• Personal guarantees.

Let’s begin with credit card authorizations: Assuming the credit card information collected is valid — and you can contact the bank to verify this — you will be able to run the card for outstanding balances over a certain amount or a balance that stretches over a specific number of days. Not only will this decrease the cost of recovering receivables, it will generate cash flow more quickly, which is vital in the ever-intensifying competitive trucking environment.

The next measure is allowing for the recovery of interest charges and the cost of collections. Not only are these great ways to make up for the loss associated with the time value of money, they are great bargaining chips when it comes to recovering your debt.

If you are able to tell a debtor who benefited from using your trucking services that they have contractually agreed to this provision and can pay their $10,000 balance today or else you will pursue these remedies — an option that could wind up costing them thousands of dollars and more — they may stop thinking of your credit terms as an interest-free loan and opt for paying sooner rather than later.

Favorable venue provisions, No. 3 on our list, are important but often overlooked. These provisions allow you to dictate the location from which a lawsuit can be initiated.

Some states are more favorable to some industries than others, but as a general guideline, I suggest picking a venue close to home. Not only will there be more commonality with the courts in your area, in the unfortunate event of litigation — even a trial — the costs will be less.

Lastly, we come to personal guarantees. These are powerful tools, especially when providing transportation services for small businesses. They are preventive measures I rarely see used, but I applaud those who use them and appreciate their strength.

Imagine a debtor who believes to be protected by the power of his or her LLC. Now, imagine an $80,000 bill that LLC has incurred by using your trucking services and, because of poor cash management, is unable to pay its debt. The LLC goes out of business, leaving many of its creditors — including you — in the lurch.

Now imagine that LLC has a personal guarantee attached to the credit application. The owner who signed the guarantee not only has cash, but cars, house, motor home and various other assets to which the creditor can attach liens, effect garnishment or even compel a forced sale — all to satisfy that debt.

This becomes a whole other proposition — one that can leave creditors with payment for their services rather than empty-handed.

Best yet, to accomplish all of the above, there’s no need to layer the credit application with voluminous legalese, nor do you need to invest a tremendous amount of time revamping your collection processes. You simply need to incorporate these items clearly enough to create a stark contrast between actual revenue and the write-off to bad debt.

And while it may be difficult to get a potential client to assent to all of the aforementioned measures, they should be incorporated in all credit applications.

Then, wait and see what happens.

If an applicant protests too greatly over the terms, perhaps your efforts will be better spent servicing another client, rather than chasing down a querulous one for payment. 

And remember, a sale isn’t a sale until the money has been collected.

Logistical Recovery Systems has headquarters in Jacksonville, Fla., and provides third-party collections and accounts-receivable consulting services for the trucking, shipping and supply chain industries.