Consumer Credit Extension in a Small Business

Extending credit to customers or business partners can help drive sales and open doors to new sources of income. However, granting credit also carries a fair share of the risks, especially when adequate safeguards are not applied and creditors lack sufficient working capital. This section on extending credit covers the ins and outs of extending credit, including the effective use of invoices, what to consider before granting credit, regulatory compliance guidelines, an overview of consumer credit laws, and other information related to the credit extension.

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 the amount of time you have to respond to any claims for billing errors, as well as how you advertise your interest rates. Consumer credit laws also regulate how aggressive a business can be when trying to collect a debt.

Rules for credit transactions

There are also several rules that apply to any business that accepts credit or debit cards for payment. The PCI security standards describe the various rules and regulations when it comes to credit and debit card transactions between businesses and customers. These rules are applied not only to protect customers, but also to protect businesses, credit card companies, and banks from security breaches and fraud. States may also have strict laws when it comes to credit card transactions, specifying what type of information can be requested from customers using credit cards.

The rule of credit practices

One federal law that you will need to comply with if you extend credit to customers is the Business Credit Practices Regulation Rule (“Credit Practices Rule” or “the Rule”). The Credit Practices Rule applies to any creditor that is subject to the Federal Trade Commission (FTC), which includes finance companies, retailers, and credit unions that offer credit agreements to consumers. The transactions covered by the Credit Practices Rule include any consumer credit transaction, except those 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 lawsuit against your business with possible civil penalties of up to $ 16,000 per violation.

The Credit Practices Rule has three main provisions, which apply to contracts signed after March 1, 1985. First, it prohibits certain provisions in credit granting contracts. Second, it requires creditors to explain the possible liability that a cosigner could face in the event that the other person does not pay. Third, the Rule establishes situations where it is illegal to collect a late penalty. These are the general provisions of the Credit Practices Rule. For more detailed information, you can read the article How to comply with the Credit Practices Rule in this section.

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