A Simple Agreement to Improve Credit & Collections
By Shane Inglesby, CCE, Geneva Rock Products, Inc.
Credit and collections - it’s what we do for a living. Without collection opportunities, we would not be employed. As much as we bemoan the challenges we confront on a daily basis, we have to admit that this challenge is what puts food on our tables. This reality aside, one signature on a simple agreement can assist in the credit review process and help streamline collections. Obtaining a personal guarantee can literally change the way a credit manager determines credit worthiness and, ultimately, in a worse-case scenario, help collect on a past due balance.
The ultimate goal of a personal guarantee is to bind a third party to pay your company in the event of default on the part of a business that entered into an agreement to purchase and pay for goods and/or services to your company. A properly drafted guarantee agreement can be invaluable in providing additional collection options. If, for whatever reason, a company fails, you have the ability to turn to another source for payment if an individual has signed a personal guarantee.
The obvious question, however, is whether or not the individual providing the guarantee is a good credit risk. There is no point in obtaining an individual’s guarantee if that person is not credit worthy. For this reason, it is imperative that the guarantee agreement contain language that authorizes your company to pull a credit report on the individual signing the document.
NACM Business Credit Services has the ability to access personal credit reports for its members. These reports can provide an invaluable tool in further assessing the credit worthiness of an applicant at a very reasonable cost.
Depending upon who you talk to, personal guarantees can be on the same form as your credit application or on a separate page. Some attorneys believe a separate form from the application lends greater credibility to the binding nature of a guarantee if it is referenced separately from the credit application. My company always includes the personal guaranty on the same document as the credit application. It is a separate agreement from the terms and conditions section that we require to be signed on all applications. As a result, every applicant has the opportunity to sign the guarantee when an application for credit is completed.
There is no question - every applicant will not sign the guarantee. Business owners who have been well-schooled by their attorney and/or accountant will, in many cases, refuse to sign it. Some will even make their position perfectly clear by crossing out the guarantee. The position of my company is, “nothing ventured, nothing guaranteed” (pun intended).
You are assured of receiving no personal guarantee if you do not ask for it. Referencing a personal guarantee communicates to potential customers that additional agreements are or may be needed to move the relationship forward. If there is not sufficient information to make a credit decision, we will ask that a personal guaranty be provided, if one has not already been signed. In most cases, the guarantee allows for a more informed decision based upon the personal credit history of the guarantor.
Most guarantors are typically an officer/owner in the company. The personal credit report can offer insight as to how the individual will administer the affairs of the business based upon their personal business dealings.
In the event an application is received without a personal guarantee and the determination is made that a guarantee is needed, it is not uncommon for the business owner to state that their lawyer and/or accountant had directed them to never sign such an agreement. My response, as politely as possible, is “So you are asking my company to take a greater risk in your business than you are willing as an individual?” I would like to say it works 100% of the time, but it has not. But, in all honesty, it has been very effective.
If, even after all of this deliberation, you still cannot in good faith extend credit, you can always ask if there may be someone else who is willing to provide a guarantee for the company. In most cases, no one else will come forward but, by simply asking, you show a willingness to try and help the customer explore all options before declining the application for credit.
Corporate/business guarantees are another option that can be considered. This approach, in my experience, is far less common but can be used in the event of a less than credit worthy customer that can locate a business entity willing to provide a guaranty.
After credit is extended, ideally all goes well with a positive and profitable relationship having been established. However, there will be times when the benefits of the personal guarantee must be invoked-when a business does not honor its commitments and the guarantor must be brought in to actually “guarantee” payment.
The threat of taking action against the guarantor can sometimes be enough to get the company to make its needed payment. If not, the ultimate purpose of the agreement can be implemented. Approaching the guarantor can often times expedite payment. However, a worst-case scenario may be filing a legal suit where both the customer and the guarantor would be listed as the defendants.
A word of caution regarding personal guarantees - just because an individual signs the guarantee and appears to be credit worthy, it does not mean the guarantor necessarily has assets. Many games can be played, especially by owners of businesses who move personal assets to a spouse or a trust to further limit any potential liability. Personal guarantees can be of great help but they are not the end-all-be-all to providing a remedy for payment issues.
Any company that is not providing the option of a prospective customer signing a personal guarantee is missing out on what can be a very effective tool to gain more customers while helping to reduce credit risk. If you do not have a personal guarantee agreement, consult with your attorney and come up with an agreement, policy and procedure on how to best obtain a guarantee from future customers. Sales will increase and potential losses will be minimized.
