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Online Credit Applications: Doing It Right

Originally Published: March 2013


Disclaimer: The information in this article is not, nor is it intended to be legal advice. It is imperative that any action you take be done on the advice of competent legal counsel, and not based solely upon this article.

Since the creation of the World Wide Web (WWW) in 1989, the Internet has radically changed how we receive information, learn, interact, buy and sell. In December 2012, total Internet users worldwide reached a staggering 2.4 billion. (More information and links available at the end of this article.)
As the B2B world keeps pace with the cyber revolution, business transactions are trending away from paper documentation and shifting toward email and online forms. Many see credit applications as a good candidate for this electronic approach.

Online Credit Applications

Note: What follows assumes you already have a well-written credit application in use in your organization. If not, and you want to learn more about what should be included in any credit application, paper or electronic, visit our article “Credit Extensions are Loans, Insist on a Completed Credit Application”.

There are a number of advantages and issues that need be considered in transforming your paper credit application into an effective and enforceable electronic document.

Advantages of an Online Credit Application
  • Customers cannot submit incomplete forms. Online documents can be constructed so that certain fields are “required”. Every field you consider vital to the application can be coded so that the potential customer cannot submit the application without completing them.
  • Saves you time and expense. There is no need to re-key information from paper documents. The difficulties of reading a person’s handwriting are also eliminated.
  • Reduced paper and postage costs. Email is much less expensive than “snail mail”. Yes, there are the up-front costs — hardware, software, an Internet connection and email hosting, but in the long run, the cost over standard mailings is considerably less.
  • Turn-around time is faster than mailing the application and follow-up is easier and more efficient.

Developing an Online Credit Application

The prevailing wisdom is that, if your hard copy credit application is adequate for your needs and enforceable in the courts, you should use it as the template for your online version. Sounds simple enough, but there are a number of issues you must consider:
  • The credit application should not require customers to have or use special software. They should be able to complete the form with a web browser.
  • It should be easy for the customer to fill out. Consider using drop-down boxes where possible.
  • It must be clear which required field has not been completed.
  • An option for uploading documents should be included.
  • The credit application should be legally enforceable in the case of dispute. Legal enforceability is key when developing an online credit application.

Legal Enforceability


To ensure enforceability of an electronic credit application, you should document it as you would an electronic contract. E-contracts are controlled by the same legal principles that govern written contracts. Therefore, your electronic credit application must include the following basic elements of a contract:
  1. Agreement:  an offer by one party and acceptance by another.
  2. Consideration: something of legal value by one party exchanged for something of value by the other party. With an e-credit application, the creditor offers the potential of a sale on “open account” in exchange for an order for products or services.
  3. Contractual capacity: both parties must have the requisite legal authority to enter into a contract.
  4. Lawful object: the goal of the contract must be lawful.

eSignature Enforceability

Essential to a valid contract, of course, is a valid signature. However, if even one of the elements listed above is missing, the contract (or credit application) will not be valid in a court of law, no matter how it is signed.

Two pieces of legislation provide the basic requirements for electronic signatures: E-SIGN Act and UETA.

E-SIGN Act

The “Millennium Digital Commerce Act”, also known as the E-SIGN Act, was issued by the federal government to establish a legal equivalence, in interstate commerce, between:
  • Paper contracts and contracts in electronic form
  • Handwritten signatures and electronic signatures
  • Other legally required written documents and their electronic counterparts

UETA

The Uniform Electronic Transactions Act (UETA) represents the first effort at providing some uniform rules to govern state transactions in electronic commerce. The rules of UETA are primarily for “electronic records and electronic signatures relating to a transaction …”. It was designed “to facilitate and promote commerce and governmental transactions by validating and authorizing the use of electronic records and signatures and to promote uniform electronic transaction laws among the states. It is also designed to be consistent with other applicable law.”

To date, 47 U.S. states, the District of Columbia and the U.S. Virgin Islands have enacted the code or individual versions of it.  The other three states, comprising Washington, Illinois, and New York, as well as Puerto Rico introduced it as a bill this year.

Types of e-Signatures

There are basically two types of e-signatures: electronic and digital. While the terms are often used by laypersons as interchangeable, legally they are very different.

Electronic Signatures

An electronic signature can be any type of electronic consent, including a written name, an “I Agree” button or even a biometric signature or a signer’s voice signature.

However, electronic signatures may fail to be admissible or enforceable due to weaknesses in authentication or security.

To be admissible and to help ensure the enforceability of the e-contract (or e-credit application), the e-signature should have four components:
  1. Method of signing
  2. Data authentication
  3. User authentication
  4. Capture of intent
Digital Signatures
Digital signatures are preferred for use by many businesses as they include the four components listed above.

Digital signatures authenticate the identity of the sender of a message or the signer of a document, and they can also ensure that the original content has not been changed. They often include bank-level encryption technology and unique bits of personal data to ensure security and verifiability. Digital Signatures are easily transportable, automatically time-stamped and cannot be imitated by others.

Since digital signatures do require sophisticated software, businesses usually utilize a third-party e-signature provider.

Personal Guarantees

An essential part of any credit application is the personal guarantee. We recommend that every credit application – paper or electronic – include one.

See “Credit Extensions are Loans”, “Personal Guarantees” and our “Sample Credit Application” for more information on personal guarantees.

Requirements for Enforceability of an Electronic Personal Guaranty

To successfully bring  a breach of guaranty claim requires that the creditor:
  • Link the guarantor to the electronic credit application and guaranty.
  • Identify the person signing the guaranty.
  • Ensure the person is signing individually and confirming his intent to be bound by the guaranty.
  • Confirm that the personal guaranty links to the related debt.
Digital e-signature technology is capable of handling these requirements. That is not the case with a simple electronic signature.

Conclusion

As advances in technology continue to offer ways to make life easier, or at least faster, customers will come to expect their suppliers to do the same. Forward looking businesses that take the lead in applying available technology will become the “big winners” in the new eMarketplace.


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Additional Information re: the Inception and Growth of the Internet

The Internet was initially developed in 1958 and its leap into public and business use occurred in 1989, when Tim Berners-Lee created the world wide web (WWW). In December 1995 the estimated number of users was already 16 million (0.4% of the world population).  By the end of the next decade (December 2005), global users had increased 62.6% to 1,018 million or 15.7% of the population.  In December 2012, total Internet users worldwide reached 2.4 billion (approx. 135.3% increase)!