Elaine Stanley decides that she will start a card and gift shop in leased space in a shopping mall. Her personal assets are not sufficient to finance the business so she borrows some initial working capital from a bank. She purchases some display fixtures from a local supplier, making a small down payment and agreeing to pay the balance of the purchase price over the next two years. She purchases her initial inventory from several suppliers, agreeing to either pay for the goods within 60 days or to pay interest at the rate of 15 percent per year on any unpaid balance. To attract customers, she plans to offer both a layaway plan and store charge accounts. Among the questions raised by this hypothetical are:
How can the creditors of the business, such as the bank, the supplier of the display fixtures, and the suppliers of the inventory, obtain security for the credit they have extended to Elaine?
What steps must the creditors take to obtain maximum protection against Elaine and against her other creditors in the event she defaults on her obligations?
What relative rights will the creditors have against each other in the event Elaine defaults on her obligations to them?
How can Elaine protect herself when she extends credit to her customers?
If a customer has paid Elaine a significant amount of the agreed-upon price for an item Elaine is holding for her on layaway and then defaults on paying the balance of the purchase price, would it be ethical for Elaine to retain all of the money she has received as well as the item, or should she return some of the money paid to the customer?
