Be Smart About Extending House Credit

Businesses nationwide are making the move back to house credit, and the nation’s truckstops and travel plazas are no exception. When done right, house accounts can boost customer loyalty and save operators money, but they also carry risk. What’s more, thin margins on fuel mean operators have little room for error when determining who is a worthy credit risk.

“Credit risk is real and it pays to have some filters in place to mitigate that risk,” said Yuval Bar-Or, an adjunct professor of finance at Johns Hopkins University’s Carey Business School and author of Play to Prosper: The Small Investor’s Survival Guide.

Ira Bornstein, chief operating officer of merchant services provider American Bancard, said he is seeing more and more merchants take on that risk. “The reason you’re seeing an increase in house credit on the merchant side is they don’t want to pay credit card fees. On the buyer side, in the past three years due to the financial world, people’s credit limits are being cut back,” he explained.

Operators need to establish a customer’s credit worthiness before extending credit, and a detailed, signed credit application can help operators protect themselves.

“Take nothing for granted and come up with an application form to gather the information you need to know,” said Charles Green, author of The SBA Loan Book: Get a Small Business Loan—Even With Poor Credit, Weak Collateral and No Experience. “Sometimes people lend credit without even knowing who they are lending credit to.”

Truckstops and travel plazas may be lending to owner-operators and fleets, but no matter what size the operation is, they should look at the people behind the business in addition to the business itself.

Bornstein said, “The money may be going to a company name, but you need to consider the individual rather than the company. You’re looking at the person for his or her reputation and past performance, and you’re looking at the company to see if they have the cash flow and the longevity to pay you back.”

John Langley, travel center director for Golden Acorn Travel Center and Casino, said most of his house accounts are with local governments, which tend to be less of a credit risk.

David Conner, owner of Conner’s Gas and Diesel in Houston, Texas, said, “On our credit application, we have them put down references, like a parts house or a tire salesman. We call and check the references.”

Actually checking out credit references is key. “You want to talk to a prior or current banker and you want to speak with vendors for that business,” Bornstein said. “When you do vendor references, you want to look at what their motivation is. Will they only get paid if you extend credit?”

When requesting references, operators may want to ask for the names of their customer’s customers. “If you ever have to track them down, you have somewhere to start looking,” Green said.

Bar-Or believes an assessment of management’s skill and credibility can also be useful.

As important as verbal references are, Bornstein said it still comes down to bank statements. “Show me your activity that proves you’ve been paying your bills. That tells me even more,” he said.

To delve deeper into someone’s credit history, operators can pull credit reports from one or more of the three major credit-reporting agencies, Equifax, Experian and Trans Union. “With a credit bureau you can get a credit report and learn more about how this person has handled his credit before,” Green said. “You may find this person has handled everything as agreed. You may also find that they owe everyone and their brother.”

While the three major credit bureaus will provide reports on the individuals involved in the business, they won’t cover the business itself, Green said. Business credit reports can be obtained from Dun & Bradstreet.

Operators should also consider running background checks in addition to credit checks. Bornstein recommends Accurint from LexisNexis, which draws on more than 4 billion public records, including criminal records.

When evaluating credit histories and financial statements, operators may want to factor in the seasonality of their customers’ businesses. “I’m in south Florida. Our seasonality is based around snowbirds and is great [in the winter months]. I have people coming to me in May and June showing me how great their business is doing, but their season is ending,” Bornstein said.

When reviewing credit applications, Bornstein looks at the “hurdles” and “brick walls” that arise. “Hurdles are negative things that impact my decision and there are only going to be so many hurdles I will look to overcome. Then there are brick walls. If I pull a background check and they’ve been convicted of financial fraud or are currently in bankruptcy, that is a brick wall,” he said.

When considering new accounts, operators can ease in slowly by offering less credit at first and then increasing credit lines after their customers’ establish their payment history.

Bar-Or suggested an ultraconservative approach whereby operators place new clients on a trial status for six to 12 months, before even offering credit. “Once that business has proven that it is making payments without any danger flags—bounced checks, etc.— some modest amount of credit can be extended.

Another way to minimize risk is to obtain collateral from customers. At Conner’s, credit customers are asked to put down a $1,000 deposit. “If the risk is going to be on us, we have to have a deposit,” Conner said.

As part of the credit process, operators need to determine their credit terms. Bornstein said the shortest terms possible are ideal, but added that the truckstops’ or travel plazas’ bankers can recommend terms for short-term financing.

“If you’re drawing on your bank lines, then you go upstream to determine your rules,” Bornstein said. “If you issue credit to multiple fleets and they all go bad, it isn’t just your problem, it’s your banker’s problem.”

Conner said he is careful not to let customers get too far out with credit. “If I have two weeks worth of bills here, I’m shutting them down and calling them,” he said.

Green urged operators not to let customers go above their set credit limits. “Don’t let them widen your risk unnecessarily,” he said.

In addition to determining when they need to be paid, operators may want to pre-determine late-payment penalties.

Once they’ve issued credit, operators can’t just set it and forget it. They should check in periodically, but how frequently they pull credit reports and review their customers’ accounts will likely vary based on the amount of the credit line.

While credit can help operators attract drivers, they don’t want to attract the wrong drivers. “There is always the temptation to extend credit in order to win the business. Keep in mind that if you are the least picky extender of credit on your stretch of highway, you may also attract all the worst customers—those who can’t get credit anywhere else,” Bar-Or said.

Make the Most of a Credit Application
Operators don’t just need to gather information on credit reports — they need to gather the right information.

“You’re collecting personal information, which includes name, social security and where to find them if things go bad,” said Ira Bornstein, chief operating officer of merchant services provider American Bancard.

Michelle Dunn, author of The Guide to Getting Paid: Weed Out Bad Paying Customers, Collect on Past Due Balances and Avoid Bad Debt, suggests business owners gather the following items on a credit application: full name; business name; mailing and physical addresses; phone, cellular phone and fax numbers; email address; website address; the names of principals in the business; when the business was founded; the customer’s bank’s name, address, phone number and types of accounts; and three vendor references with names, addresses and phone numbers.

Charles Green, author of The SBA Loan Book: Get a Small Business Loan — Even With Poor Credit, Weak Collateral and No Experience, suggests operators also obtain a driver’s license number and credit card information on their credit applications.

“It is very telling if they don’t have a MasterCard, Visa or American Express. If they do have one, [operators] can get the number and expiration date. In the fine print you could include language that any unpaid accounts over 45 days may be charged to the credit card,” Green said.

Dunn told Stop Watch credit applications should also outline the terms of payment in detail and allow for any penalties arising from non-payment or late payment, including any late fees or interest they may charge, attorney or court fees or collection costs.

As an added safeguard, for small-business financing, Bornstein recommends truckstop operators always have both the corporation and the owner guarantee the transaction. “Otherwise, the owner can simply file bankruptcy on the company and wipe out the debt,” he explained.

Ultimately, Bornstein recommends an attorney review any financing agreement. “The templates on the Web or in bookstores are not necessarily appropriate,” he said. 

Credit applications should always be signed by the customer, and the business owner should keep the original copy with the original signature.

This article originally ran in Stop Watch magazine. Stop Watch provides in-depth content to assist NATSO members in improving their travel plaza business operations and provides context on trends and news affecting the industry. The magazine is mailed to NATSO members bimonthly. If you are a member and not receiving Stop Watch, submit a request to be added to the mailing list. Not a member? Join today or submit a request to receive additional information.