What Should Be in the Credit File

When taking legal action because of nonpayment or bankruptcy of a customer, some credit managers find they do not have the information they need. If the facts and figures were not collected when the account was first opened, the customer will probably not provide them when the account gets into financial difficulty. This information is not difficult to obtain when the account is first set up. The customer is interested in putting on a good face with the vendor.While amassing these reports for each new customer may seem a waste of time, the credit professional will be paid back many times over for this effort when the account goes bad. So, exactly what should you keep in debtors’ credit files? The following information comes from Creim, Macias & Koenig, LLP.

Basic Information

The data listed in this section are usually needed to prepare documents. While it seems elementary, some credit professionals report it missing from their files. It includes:

• The identity of the debtor, including its correct name, form of business, and whether it is one entity or multiple entities
• Locations of the debtor
• Locations of the debtor’s assets
• Value of collateral
• Form of debt (invoices, statements of accounts, promissory notes)

Creditor Documents

“A credit application,” says Bill Creim, one of the firm’s partners,“is the one document the debtor signs, so include all areas where difficulties are likely to arise.” He recommends including terms, conditions, and whether interest may be charged on late payments. He delineates the items that should be included in the file as follows:

• Credit applications, security agreements, dealer agreements or distributor agreements, sales contracts, guarantees, and other written correspondence showing

• Interest
• Attorney fees and collection costs
• Acceleration
• Debtor’s books and records
• Jurisdiction and venue clauses
• Arbitration clauses

• Financial information including

• D&B, Experian, or other credit reports
• Audited financial statements
• Unaudited financial statements

• Unmarked original documents and letters contained in credit manager’s and salesperson’s files
• Invoices and statements of account. Creim warns credit professionals to beware of usury problems, collection costs, and payment terms.

Other Sources of Information

In addition to the details listed above, miscellaneous intelligence—such as information from banks, other creditors, or competitors—should be included. Creim warns credit professionals that they must make sure that nothing in the file could be misconstrued as slander or interference with normal business relationships. Credit professionals must also omit anything that might show antitrust violations.

Much of the material kept in the credit files needs to be updated regularly. New financial reports and sales contracts should routinely be included in the credit files. Similarly, new credit reports should be pulled periodically to make sure your customer’s financial standing is as good as (or better than) it was when the account was first opened. In the current environment, which Creim describes as “we cheat our suppliers and pass the savings on to you,” it is imperative that credit professionals do everything to protect their companies against nonpayment.

Some companies actually have the information discussed above but cannot find it when it is needed. The importance of having all relevant documents in one place should not be underestimated.