PERSONAL GUARANTEES
01 09 2007
PERSONAL GUARANTEES
On many occasions your clients will be supplying goods and services to its customers on credit and where the customer is a corporate entity. To improve your clients’ prospects of recovering its debtors, your clients should have a policy of ensuring that all customers have signed a credit application and that the terms of trade within that credit application include a provision for the execution of personal guarantees where the prospective customer is a company. This should be done before your client commences trade with any new customer.
We often hear from a practical perspective that the supplier didn’t have a credit application and personal guarantee executed for the sole reason that they were “too concerned about upsetting the customer” to insist on a credit application and personal guarantee being completed. This is an extremely conservative and outdated view in our opinion and often driven by the sales people in an organisation who sometimes don’t appreciate that not all sales are good sales (i.e. if you ultimately don’t get paid).
The above concern is normally misplaced as business people in the 21st century accept that credit applications and personal guarantees are simply part of doing “everyday business”. In reality, your clients should give serious thought to not dealing with anyone that is not prepared to agree to its trading terms.
Our philosophy is “if you don’t ask you don’t get!”
Before commencing trade with a new customer have your client send to the prospective customer its credit application with the personal guarantee. If the customer refuses to sign the personal guarantee have your client ask the customer why it is not prepared to sign the guarantee? Do the directors of the corporate customer not believe in the financial viability of their company? By refusing to sign are the directors of the customer simply saying that they prefer that it is your client who should carry the risk of their company failing and not themselves personally?
If they refuse to sign then it is up to your client to make an assessment of the risk in dealing with this particular new customer. At least ask the question!
Do your clients maintain a Personal Guarantee register outlining which corporate customers have signed a personal guarantee? In reverse, do your clients maintain a register of what personal guarantees they have signed?
We recommend that your clients seek independent legal advice before inserting a personal guarantee into its terms of trade or before signing a personal guarantee themselves.