As we have discussed many times before, extending credit is a risky business and minimizing any threat to your bottom line is the name of the game. One of the ways that companies go about this is asking customers to sign guarantees. These can come in many forms and each has inherent benefits and risks.
What is a guarantee?
In the event of non payment, a guarantee allows you to seek payment not just from your customer but also from whoever signed the guarantee. As you will see later, this may mean the owner of the company may be personally liable for the debt or that responsibility could even be on a parent company. Whatever the case, a guarantee gives you more avenues to pursue if non payment becomes an issue.
Is a guarantee right for you?
Most customers will probably be reluctant to sign any form of a guarantee. With that being said, if you have a product that they need or they have a risky credit profile, they may not have much negotiating room.
The Personal Guarantee
The most common and simplest guarantee is a personal guarantee. A personal guarantee essentially holds that person liable for the debt in the event that the company can not cover the payment. Some important dos and don’ts of personal guarantees are:
- Always have a lawyer read over the agreement you plan to use. You will want to make sure if applicable any duration, limits , etc. are worded correctly as well as some states may have certain requirements.
- A credit report permission statement should be included in the form
- Make sure the form includes the following: legible legal first and last name, residential address, phone number, and social security number.
- Keep your credit file up to date. If the guarantor loses or transfers their assets they may no longer be able to adequately cover payment.
- Do not accept a guarantee from anyone outside the united states or someone with little to no assets.
Something important to note is that in community property states (in which husbands and wives have equal and joint ownership of marital assets), special consideration should be given. In some cases it is not possible for one spouse to guarantee debt with the assets of the other. In these cases you should consult a lawyer and consider asking both to sign a guarantee. Obviously this may be met with resistance but all options should be explored.
Another form of a guarantee is called a cross-corporate guarantee. In this case, the parent company of a subsidiary takes responsibility for the debt in the case that the subsidiary can not pay. In all cases though, the agreement should be thoroughly vetted by a lawyer before any agreement is made.
Guarantees can be a valuable tool in securing payment and minimizing the risk associated with the credit process but it should be noted though that many customers will be reluctant to sign any sort of guarantee. Guarantees are tools in the arsenal of a credit department and should be used when necessary, but are by no means a requirement.