Considering extending credit to another business? Learn how to protect yourself and abide by the government laws regarding extension of credit and debt collection.


It is important that your customer fills out a credit application so that you have a written agreement regarding the transaction. The application should contain basic information about the business customer (i.e. name, address, years in business, trade references, commercial credit score) which can be used to make a preliminary assessment of whether or not it would be a good idea to extend credit to the customer. Most creditors require three trade references who can be contacted for information on the customer’s credit history.

Credit Policy

A comprehensive credit policy will include an investigation into the credit history of the company and owner. Dun & Bradstreet is widely used for company credit reports, while for individual reports Trans Union, Experion, and Equifax rank highly. The commercial credit score provides a quantitative method to gauge whether or not a company can fulfill its debt obligations within 90 days past the due date. The score lies within a range of 101-670, where a score of 101 is likely to default, and a score of 670 is not likely to default.

You will also have to set the number of months that you will provide financing, established interest rate, due date, and penalties for late payments. Having an established interest rate in the range of 1-2% provides incentive for customers to make timely payments. For more information on writing credit forms, visit the Small Business Administration’s website.

Late Payments

In order to determine a reasonable collection due date, research the industry averages for accounts receivable turnover. Regardless of how careful you are in extending credit, there are going to be customers who default on their loans. There are several ways that you can deal with late payments. Contact your local consumer protection agency, which can offer advice and insights into state laws that relate to debt collection.

Depending on your industry, other options include use of a collection agency, which will take a cut of the amount collected for the courts. For more expensive inventory, security interest gives you the right to seize or sell the goods if the customer doesn’t meet the terms of payment. In order to take advantage of security interest, you will need a security agreement and UCC financing statement.


The Equal Credit Opportunity Act, Fair Credit Reporting Act, and Fair Debt Collection Practices Act are all laws worth knowing before extending credit. The Equal Credit Opportunity Act, says that businesses cannot discriminate in their extension of credit to people based upon “race, color, religion, national origin, sex, marital status, or age,” or because of their participation in a government assistance program. The Fair Credit Reporting Act is a U.S. federal law that dictates how you can collect, distribute, and use consumer credit information. And, the Fair Debt Collection Practices Act, part of the Consumer Credit Protection Act, is used to govern consumer debt collection. It lays out guidelines for how debts can be collected and how consumers can contest and validate information regarding debt.


1) eHow: “How to Extend a Business Credit”

2) SBA: “Extending Credit to Your Customers”

3) Bright Hub: “Developing Solid Business Credit Agreements”

4) All Business: “Extending Credit to Business Customers”