1

In business-to-business credit granting, can the credit department withdraw or reduce open account terms at any time for any reason or for no reason? I think most people would say ‘Yes’. In my opinion, the answer is ‘Maybe’. For example:

  • You cannot reduce or withdraw open account terms if the decision to do so is based on factors including Race, Religion, Age, or Sexual Orientation.
  • You cannot reduce or eliminate open account terms if there is a law that prevents you from doing.

You might respond that this is not the case in the United States. Assuming that is true, my question is this: Are there laws limiting your right reduce the credit limit in the other countries in which you do business?

If you have a contract with a customer that limits or prevents you from taking unilateral action in connection with lowering the credit limit, then obviously the actions of the credit department in this regard are constrained.

What are your opinions of this subject? As always, I welcome your feedback.

This topic will be covered at the upcoming CreditScape Fall Summit, September 17-18 at the Tropicana in Las Vegas. For more information about the conference, visit www.creditscapeconference.com. I hope to see you there.

Michael C. Dennis is the author of the Encyclopedia of Credit, a free, fast, internet resource for credit and collection professionals. He is a frequent instructor at CMA-sponsored educational events. His most recent book, “Happy Customers, Faster Cash,” is available at amazon.com. He can be contacted at 949-584-9685.

One Response to “Can the Credit Department Reduce (or Withdraw) Open Account Terms?, by Michael C. Dennis”

  1. Guy Nishida says:

    Michael,

    The following is part of our Credit Application and Sales Agreement which is signed at the time the account applies for credit:

    THE GRANTING OF CREDIT AND PAYMENT TERMS SHALL BE EXTENDED AT THE SOLE DISCRETION OF …….. CREDIT MAY BE INCREASED, DECREASED, OR TERMINATED AT ANY TIME. CREDIT IS BASED IN PART ON COMPLETION OF THIS APPLICATION, THE RESPONSES FROM THE BANK AND TRADE REFERENCES AND THE TIMELINESS OF PAYMENTS IF CREDIT IS APPROVED. IF YOUR ACCOUNT IS INACTIVE FOR 12 MONTHS, CREDIT PRIVILEGES MAY BE CANCELLED AND A NEW APPLICATION MAY BE REQUIRED. NO ADDITIONAL NOTIFICATION WILL BE SENT.

    Our internal credit policy manual covers this issue as well:

    The extension of credit is always conditionally granted. Unless …. is bound contractually, all terms and credit limits as well as actual practices can be amended at any time with or without notice at ….. discretion based upon changes in the customer’s payment history, buying frequency, our dollar exposure and the aging of the open invoices, profitability, or the discovery of any relevant information from whatever source that materially impacts the credit-worthiness of an account or ….. competitive position. However, if advance notification can be transmitted to the account without unduly jeopardizing ….. collection ability, advance notice will be given.

    Credit Revocation:

    At the sole discretion and judgment of …., the granting of credit for any …. customer may be revoked or reduced without notice for Good Cause. Good Cause is defined and measured by …. as unsuccessful efforts to reach an understanding and agreement with the customer to remit full payment of amounts owing within approved terms on a consistent basis without the necessity of contact and/or the holding of orders. The customer’s payment performance MUST reflect this understanding and agreement. In the case of legitimately disputed invoices, all undisputed amounts must be paid timely or credit revocation may still be considered.

Leave a Reply