Extending credit to customers or business partners can help boost sales and open doors to new revenue sources. But extending credit also comes with its fair share of risks, especially when the proper safeguards are not put into place and creditors are left without enough operating capital. FindLaw's section on Extending Credit covers the ins and outs of credit extension, including the effective use of invoices, what to consider before extending credit, regulatory compliance guidelines, an overview of consumer credit laws, and other information related to extending credit.
Consumer Credit Laws
Extending credit means that your business will have to comply with various federal and state consumer credit laws, which regulate many aspects of your business's interactions with customers. Consumer credit laws include rules that regulate how much time you have to respond to any billing mistake claims, as well as how you advertise your interest rates. Consumer credit laws also regulate how aggressive a business can be when attempting to collect a debt.
Rules for Credit Transactions
There are also various rules that apply to any business that accepts credit or debit cards for payment. The PCI security standards outline the various rules and regulations when it comes to credit and debit card transactions between businesses and customers. These standards are in place not to only protect customers, but also to protect businesses, credit card companies, and banks from security breaches and fraud. States can also have strict laws when it comes to credit card transactions, specifically addressing what kind of information can be requested of customers using a credit card.
The Credit Practices Rule
One federal law that you will need to comply with if you extend credit to customers is the Credit Practices Trade Regulation Rule ("Credit Practices Rule" or "the Rule"). The Credit Practices Rule applies to any creditor who is subject to the Federal Trade Commission (FTC), which includes finance companies, retailers, and credit unions that offer credit contracts to consumers. The transactions covered by the Credit Practices Rule include any consumer credit transactions, except ones that involve the purchase of real estate. If the Rule applies to your business, compliance is imperative because a violation of the Rule can result in a federal suit against your business with possible civil penalties of up to $16,000 per violation.
The Credit Practices Rule has three major provisions, which apply to contracts signed on or after March 1, 1985. First, it prohibits certain provisions in contracts involving credit extension. Second, it requires that creditors explain the possible liability that a cosigner could face in the event that the other person doesn't pay. Third, the Rule provides situations in which it is illegal to charge a late fee. These are the general provisions of the Credit Practices Rule. For more detailed information, you can read the How to Comply with the Credit Practices Rule article in this section.
Hiring a Business and Commercial Attorney
If your business will extend credit to customers and/or business partners, it's important to comply with the laws applicable to extending credit. A local business and commercial attorney can help you create a procedure for extending credit that will both comply with applicable laws and safeguard your business.
