Just Say No

You've heard the warnings about extending credit, but turning down credit risks isn't as easy as it sounds. If you deny credit to another business, you must follow certain federal guidelines when you tell them your decision. The provisions of the Equal Credit Opportunity Act (ECOA) became mandatory for business creditors in 1997 and are designed to protect companies from illegal credit discrimination.

Within 30 days of denying credit to an applicant, you must provide a notice containing a statement of the action taken, the specific reason for the denial of credit, the name and address of the creditor, and a copy of ECOA Notice 701(a), which is a statement of the ECOA anti-discrimination law. Also include the name and address of the federal agency that administers compliance. Consider drafting a standard letter that includes these points, with the reasons listed with check boxes next to them.

Some specific reasons for the denial of credit may include delinquent credit obligations, unfavorable references, the need for additional references or the inability to verify references. Do not cite your own internal standards and policies or the applicant's failure to achieve a qualifying score on your scoring system, as these would not be specific enough to comply with the requirements of the guidelines.

You must maintain records on credit applicants for up to one year, depending on the size of the company you denied credit to and whether they request additional information about your decision. For complete information on your rights and obligations as both a business creditor and borrower, contact the Federal Trade Commission, Sixth & Pennsylvania Avenue N.W., Washington, DC 20580, (202) 326-2222.

Contact Sources

Business Against Substance Abuse Coalition, (614) 224-4506, deemer@aol.com

.Com Marketing, (407) 774-4606, bressler@commarketing.com

This article was originally published in the December 1997 print edition of Entrepreneur with the headline: Just Say No.