As a business, you might extend credit to your customers and get it covered by a guarantee, either from your customer’s company or from one or more of the owners.
Although these personal or company guarantees are seen as “security” for the original credit, they are themselves not secured in any way (unless the guarantor is also willing to give you a mortgage over a property or other assets).
Why you might accept a guarantee
As a supplier, you might accept a guarantee to support trading with a customer because:
- The customer is a very new company, so they don’t have much credit history to demonstrate whether they are good or bad at paying bills
- It’s a new customer to you
- It’s an existing customer but you have had difficulty getting their bills paid promptly (although you otherwise think of them as a good customer)
Guarantees generally make suppliers feel better, as they are taken to increase the chance of you recovering the amount of credit that has been provided to the customer.
What often happens
Do you recognise this scenario?
You got your customer guarantees documented nicely and neatly, then tucked them away somewhere safely where they are sitting and gathering dust.
What to do instead
It’s important to remember that there are at least four constantly moving pieces in any customer/supplier relationship.
- 1. The value of your customer’s account. Over time, this will grow, shrink or stay steady.
- 2. The degree to which your customer complies with your payment terms. This can be good, bad, or patchy, and can change over time.
These first two can be monitored closely from your own internal information.
- 3. The customer’s financial condition.
- 4. The financial condition of the customer’s parent company or personal guarantor.
These last two are harder for you to monitor in real time.
It’s entirely normal that your customer and its parent company only publish accounts on a historic basis, so, by the time the information becomes available at Companies House, it could be old enough to be virtually irrelevant.
The requirement is that accounts are filed within nine months of the end of a financial year. That can mean that some of the information from the early part of the financial year which is included in those accounts can be up to 21 months old by the time it is available to you at Companies House; hardly “hot off the press”. If your client is an individual or an (old style) business partnership that is not registered at Companies House, you will not even have easy access to that sort of information.
What this means to you
Be vigilant about checking credit references before you enter into any new customer relationship.
Where you are less able to have real-time information, you need access to all the information that IS available.
If you have an agreement that means you are entitled to receive regular and up-to-date (say monthly or quarterly) management information from the customer or their parent company, make sure you receive it regularly and in a timely fashion. Make sure you look at it! And when you look at it, ask questions if anything is not clear. Don’t let it gather dust, otherwise you will fail to see any red flags.
The approach above is largely from a financial and commercial perspective, but there are legal issues to keep on top of as well.
- Is the guarantee properly documented?
- Are the correct parties named?
- Is the guarantor still alive (trading if it is a company) and financially well?
- Has there been a corporate reorganisation at the customer’s end which means you might have to rethink or replace the guarantee?
- Is the scope of the guarantee still appropriate?
- Are there any financial or time limits on the guarantee?
- Is the guarantee specific? Or is it an All-Monies Guarantee?
Specific guarantee: “I am guaranteeing to cover all John’s spending on electrical goods at John Lewis.”
All-monies guarantee: “I am guaranteeing all John’s debts to John Lewis, regardless of what they are for.”
Keep an eye on your guarantees. They are often put in place and left for a long time. But business relationships can change over time.
Every guarantee is a living arrangement and you have to keep managing it. Keep assessing whether or not the guarantee remains appropriate, and that the level of credit you are offering remains appropriate.
Ideally, a guarantee should be written (or if need be, re-written), to cover the credit relationship you now have with the customer and not the relationship you had 10 years ago which might have now changed beyond all recognition.
Make sure your guarantees are commercially applicable, legally valid and enforceable.
By keeping an eye on your guarantees, you get:
- The opportunity to respond to a need for change before it becomes a problem
- The opportunity to try to keep the guarantee arrangement properly aligned with the customer relationship
- The opportunity to avoid finding out that the guarantor has suffered a financial collapse meaning the guarantee would be of little or no use if the customer fails to pay their debts to you
- More reassurance
If you need help with any of this, please let us know.