A credit application is not just an administrative form — it is a legal document that creates rights and obligations for both parties. Most businesses use standard credit application templates that have not been reviewed since they were drafted. When a debt goes bad, the quality of the credit application determines what the creditor can claim, whether a personal guarantee is enforceable, and whether recovery costs can be passed to the debtor. Five clauses make the most difference.
1. The personal guarantee clause
A personal guarantee in the credit application — where a director, partner, or individual signs as guarantor — creates personal liability for the company's debt. The guarantee must be signed by the guarantor personally (not by the company) and should be witnessed. Many credit applications purport to include a guarantee but are signed only by the company — the guarantee is not executed and may not be enforceable. Check that your application form requires individual signatures from guarantors, separate from the company authorisation.
2. The PPSR consent and retention of title clause
If you supply goods and wish to retain title to those goods until payment is received, your credit application must: include a retention of title clause specifying that title does not pass until full payment is received; and include the debtor's consent to the creditor registering a PPSA security interest on the Personal Property Securities Register. Without the registration, a retention of title clause may be worthless against a liquidator.
3. The interest on overdue amounts clause
Interest on overdue amounts is only claimable if it is contractually agreed. The credit application should specify: the rate (either a fixed percentage or a reference rate plus margin); the basis of calculation (simple or compound); and when interest commences (on the due date or on a specific number of days after). A vague clause ("interest may be charged at our discretion") is not a reliable basis for claiming interest in proceedings.
4. The recovery costs clause
Debt recovery costs — agency fees, legal costs — are only recoverable from the debtor if the credit application provides for it. A clause specifying that the debtor is liable for "all reasonable costs of recovery, including collection agency fees and legal costs, on an indemnity basis" creates the contractual basis for recovering those costs. Without it, recovery costs are your expense, not the debtor's.
5. The credit reporting and privacy consent clause
Listing a default on a credit bureau or sharing information with a collection agency involves disclosing personal information. Your credit application should include the debtor's consent to: the use of their personal information for credit assessment and recovery purposes; disclosure to credit reporting bodies; and disclosure to recovery agents acting on your behalf. This consent clause also enables you to conduct credit checks on the debtor at any time during the credit relationship.
Review your credit application against these five points. If any are missing or poorly drafted, address them before the next customer account is opened. Contact Merion if you want to understand how your current credit documentation interacts with recovery outcomes.