Offering your products and services on credit can be a great way of attracting and retaining customers, but it can also lead to huge losses – even the complete shutdown of your business – when clients fail to follow through with their payments. Having a well drafted and fully comprehensive credit application is the first step in ensuring that your business is protected from any credit risks.

If you are planning on offering fixed term payment agreements to the public, it is important to
adhere to the provisions contained in the Consumer Protection Act, Act 68 of 2008 (the Act) The
objectives of the Act is to promote fairness, openness and good business practices between
suppliers of goods and services, and Consumers of these goods and services. Importantly, the
provisions in the Act regarding a fixed-term agreement only apply to transactions entered into with a
natural person, not with a juristic person (including a body corporate, partnership, association or
trust).
A fixed term agreement is exactly what the name implies, it is an agreement that runs from one
specified date to another specified date.
This article focuses specifically on cancelation and renewal:

  1. A consumer may cancel a fixed term agreement The requirements for such a cancellation
    are as follows:
    a. The consumer must give 20 business days’ notice of its intention to cancel the
    agreement;
    b. Notice must be given in writing or other recorded manner;
    c. The consumer is liable for payment of an early cancellation fee, which must be
    reasonable, it should therefore not be of such a nature that it defeats the purpose of
    cancellation;
    d. Any amount that is still due on date of cancellation must be paid Cancellation does
    not absolve any obligations in terms of the agreement; and
    e. Consumer should be refunded with any amount that is due to a consumer on day of
    cancellation.
  2. Suppliers may also cancel the agreement because of a material failure by the consumer BUT
    the supplier must notify the consumer of the material failure/breach by giving 20 business
    days’ notice thereof.
    A consumer may remedy the failure within the 20 business days’ time. If they remedy within
    this period, the supplier may NOT proceed with cancellation of the agreement.

Material failure is a failure by one of the parties to a contract to fulfill one or more
obligations essential to the agreement. For instance, if a consumer fails to make monthly

payment in terms of the agreement, the service provider should give notice of failure to pay,
20 business days prior to cancelling the agreement. A consumer can still pay within the given
20 business days and then the service provider is no longer allowed to cancel the agreement.

  1. It is important that the Supplier give notice of expiry of fixed term agreements to
    consumers, prior to the expiry date. This should be given:
    a. In writing;
    b. Between 80 and 40 days prior to expiry;
    c. Notice of expiry should include renewal terms, specifically the material changes to
    the agreement should the agreement be renewed.
    For example, the price of the service will increase by 10% upon renewal.

What do you do if a consumer does not expressly cancel or renew the agreement?
A consumer can cancel a fixed term agreement upon expiry without any extra charges or penalties.
When an agreement expires on the initial agreed date, a consumer is still obliged to give express
instruction to the supplier to terminate the agreement on the expiry date. If they do not instruct the
supplier to cancel, the agreement will continue on a month-to-month basis and on the renewal,
terms provided by the supplier 40 – 80 days before the initial expiry date.
It is important to ensure that the consumer and supplier’s rights are recognized when entering into
an agreement. Agreements should, always, be drafted to be fair and reasonable in respect of both
parties in order to promote a fair marketplace for all.

Offering your products and services on credit can be a great way of attracting and retaining customers, but it can also lead to huge losses – even the complete shutdown of your business – when clients fail to follow through with their payments. Having a well drafted and fully comprehensive credit application is the first step in ensuring that your business is protected from any credit risks.

Before we outline what constitutes a fully comprehensive credit application, we must understand the different types of credit agreements for which a credit application may be required. The National Credit Act No. 34 of 2005 (NCA) provides for four different types of credit agreements namely:

  1. Credit Facilities. Your business provides goods, services, or pays an amount to clients in an arrangement that allows the clients to make deferred payments of any part of the cost of goods or services provided or the amount paid, alternatively where the clients are billed periodically for any part of the goods, services or amount paid. Any charges, fees or interest payable to your business for the aforementioned also form part of the credit facility.
  2. Credit Transactions. These include pawn transactions, incidental credit agreements, instalment agreements, mortgage agreements and lease agreements.
  3. Credit Guarantees. Where a person undertakes or promises to satisfy upon demand any obligation of another client in terms of a credit facility or a credit transaction.
  4. Any Combination of the above. 

If your business only charges interest when the client fails to pay for the goods, services or amount provided, for a certain specified period of time, then an incidental credit agreement is automatically created.

Incidental Credit Agreement vs Normal Credit Agreement

If your business charges interest from the onset – from the initial day the goods, services or amount is provided – this is known as a “normal credit agreement”. Once default interest is charged and becomes payable after a specified period of time, then an “incidental credit agreement” comes into effect.

An incidental agreement is usually created by means of a term on an invoice or statement of account which states that default interest will be payable should the invoice or statement not be paid after a specific period (e.g. thirty or sixty days).  As provided for in section 40 of the NCA, a business that is a normal service provider, must be registered as such. If a business’ credit agreements are only incidental credit agreements, it does not need to be registered as a credit provider at all.

Information that should always be included in a Credit Application

Having a good credit application will help ensure that your business is protected from credit risk. Every good credit application should consist of the following information:

  • Full name and type of client – it should be clear from the onset whether your client is a natural person, a sole proprietor, a private company, an association, or a trust.
  • Client’s identity or registration number.
  • Client’s contact details – physical, postal, and registered business address as well as telephone numbers, emails, and full names of contact persons. This will be very useful should you struggle to get hold of the client or if you have to serve any notices or take legal action against the client.
  • Client’s financial details – full banking details and trade references from other businesses the client has dealt with previously.
  • Permissions to do credit checks – this will eliminate credit risk for your business as it helps you to ensure that the client can afford the credit and the associated costs of credit and to further confirm that the client does not have any history as a bad payer.
  • Sureties and/or Director’s Guarantees – this should also contain the full names, addresses, and contact details of the sureties or directors. If the client is unable to pay, then you will be able to demand payment from the individuals directly. In the event of a client company being liquidated, you will be able to go after the directors in their personal capacities to obtain payment.
  • Name and Signature of the person signing the application either in their personal capacity or in their professional capacity if the client is a juristic person.

Reducing business risk should be one of your company’s top priorities. After all, you wouldn’t want to lose your business simply because you did not reduce the risks. Providing credit helps expand your offering, but it adds an extra layer of risk to your operation. It is important to consult with a legal expert so that your credit processes are well defined, compliant and low risk.

By Chanique Rautenbach

By
Chanica Viljoen | Associate
RMI4law members enjoy the benefit of legal advice from an attorney 24 hours a day. If you wish
to join RMI4law, call 0861 668 677.
Legalex (Pty) Ltd, registration number 2003/003715/07, is an authorized Financial Services
Provider (FSP 5277) and underwritten by Guardrisk Insurance Company Limited (FSP 26/10/75)

By Chanique Rautenbach

Senior Associate

RMI4law members enjoy the benefit of legal advice from an attorney 24 hours a day.  If you wish to join RMI4law, call 0861 668 677.

Legalex (Pty) Ltd, registration number 2003/003715/07, is an authorized Financial Services Provider (FSP 5277) and underwritten by Guardrisk Insurance Company Limited (FSP 26/10/75)

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