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

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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