Business Risk
Giving Personal Guarantees
July 2010
We all do it; often it is the only way to get trade credit with some trade suppliers. Giving these guarantees is never a problem when things are going well, but when times are tough, or the business fails, then personal guarantees become a real problem, and erode personal assets.
Trouble is, over the lifetime of being in business, we probably do not record adequately what guarantees we have out there, which have the ability to tip us up, in the event of a business failure or a dispute.
So how do we figure out what personal guarantees are out there? Knowing this is critical to ongoing business relationships, especially when there are alternative suppliers who would be pleased to do business with you. Or the guarantee you gave 10 years ago might now be cancelled or restricted.
Your bank is keen to know the extent of your personal liability, as it could have an impact of the value of any guarantee you may give them.
We advise clients to find out what guarantees are out there, in order to manage this business risk.
We suggest this simple process:
- Call or write to all trade suppliers saying you are updating your files with all preferred trade suppliers, and require up to date terms and conditions of trade.
- As an aside, seemingly of secondary importance, ask for them to send a copy of any personal guarantees or security they may hold over you and your fellow Directors personally or over your company.
In the event an old personal guarantee turns up from years ago, you can then decide what to do. Either close the account and deal with another supplier who does not require any personal guarantee, or negotiate your release from the guarantee, if the business is to continue.
If one fuel company has your guarantee, there are at least 3 others who you could deal with on more favourable terms.
In the event you are not able to get released from this obligation, at least you can manage that account. For example, never let payments on this account get behind. Almost prefer payment to limit your exposure.
Going forward, maintain a register of any personal or company guarantees, or other forms of security given to trade suppliers.
A suggested script to send to trade suppliers could be as follows:
“We are currently updating our files on current terms of trade. As a preferred supplier to our company, we would be grateful if you would forward a printed copy of your current terms of trade. We would be grateful if you would also forward a copy of any personal guarantees (if any) or other security you hold that relates to this account for supply of goods on credit.”
Important: Items contained in this newsletter are general comments only and do not constitute advice. Changes in legislation may occur quickly and clients are recommended to seek our formal advice before acting in any of the areas.
Robert Willis
Director
CST Nexia Ltd
