Offering extended payment terms can be a valuable tool to get a deal across the line. It can expand your market and accelerate sales cycles. However, there is a point where extending payment terms moves into the realm of credit sales, triggering a number of legal compliance requirements. This can be expensive, both in terms of time and money setting up your compliance regime, or if ignored, in terms of fines and penalties imposed if you manage to upset the regulatory authority in charge of this area, the Financial Markets Authority (FMA).
Generally speaking, the line between extended payment terms and providing credit is set at the 60 day mark. There are exceptions, for example, where no interest or fees are charged, or where credit contract is assigned to a finance company within one working day of providing the credit. If you offer credit, as opposed to extended payment terms, then you are treated in the same manner as a finance company – you must register on the Financial Service Provider Register (FSPR), join a dispute resolution service, pay the fees and comply with various conduct requirements.
In addition to these mandated requirements, having a sturdy set of terms of trade, including credit sale terms and conditions, can be very useful to mitigate the risk of non-payment. Registering security on the Personal Property Securities Register is essential to ensure that you maintain security priority over any goods you have sold on credit. Registered correctly, ‘super priority’ will be obtained, which will ensure that a general creditor of the purchaser (ie a bank) cannot trump your interest in the goods you have sold.
If you deal in goods that are generally used for domestic purposes, or provide credit to consumers, then there are a number of additional requirements that come into play. These generally centre around disclosure, and ensuring that the purchaser is entirely aware of what they are signing up to. Disclosure is required to be in a particular form, with specific information provided. Further, amongst other things, there is a cooling off period, where the purchaser can return the goods, and cancel the credit arrangements.
Often when there is credit, there is risk. Where there is risk, there is insurance. As such, often businesses offering credit will also offer insurance. The sale of insurance products, collection of insurance premiums and general operation as a broker in the insurance area can trigger further legal compliance and conduct requirements. This centres around registration on the FSPR as a ‘broker’, and having the correct disclosure documents in place to ensure that those looking to purchase insurance products can make an informed decision about the broker they are looking to engage. The law also requires those that receive insurance premiums (or any monies on behalf of a customer to be accounted to a third party) must use a dedicated trust account to ensure that the funds are kept safe from being spent by the broker, or seized by the brokers other creditors.
The implications of getting all of this wrong can be fairly significant. The FMA has extensive powers to order businesses that may be in breach of the rules to provide information, stop non-compliant activity, as well as fines, at both a personal and company level.
So overall, there are a number of overlapping compliance aspects to navigate if you intend to offer credit or associated products. However, a considered, properly set up credit process, embedded into your normal business can reduce this risk to ensure that you are best placed to maximise the sales opportunities available when offering credit. NWM has extensive experience in assisting businesses in these areas and can help you to comply.
Chris Steenstra is an Associate in the Commercial Corporate team at Norris Ward McKinnon, specialising in IT and Commercial Corporate law. Email Chris at: [email protected]