Obtaining guarantees from directors and trade credit
Getting a guarantee from a director when their company has bad credit
If you are dealing with a start-up or, after having gone through a credit checking process, you don’t think the company’s finances are secure enough to feel confident offering trade credit, you can seek a personal guarantee from a company director as a way of shoring up confidence. This would essentially make that director personally liable for any debts specified in the guarantee agreement. Obtaining a director’s guarantee can mean the difference between entering into a business relationship or losing out on a potential client. However, it’s worth bearing in mind that, if the director themselves does not have sufficient assets, it may not be worth the paper it’s written on.
Should I get a director’s indemnity as well as a guarantee?
An indemnity is slightly different to a guarantee and provides a bit more protection for the debtor. It can be useful to get both a guarantee and an indemnity from a director - although it may be easier to obtain the former. Whichever option you choose, it’s a wise idea to check the creditworthiness of the director themselves before relying on either a guarantee or indemnity. Many budding entrepreneurs will not have any assets and, if their business fails, they may face personal bankruptcy, leaving you out of pocket.
Asking a parent company to provide a guarantee
Guarantees and indemnities don’t need to be provided by a company director. If there is a parent company which is in a better financial position, it may be a good idea to ask for this stronger party to assume liability for any debts accrued by their subsidiary in relation to trade credit. Similarly, if you are dealing with a young entrepreneur without sufficient assets to provide any sense of security, you could try and obtain a guarantee from their parents or another third party whose financial position is more certain or tangible. However, it may be very difficult to get either a guarantee or indemnity from anyone not directly connected to the business. Ultimately you will need to weigh up the pros and cons of offering trade credit to a financially insecure business and decide whether the possible loss of credit offered would be worse than losing out on a potential steady stream of income.
A variety of documents which may help with guarantees and indemnities can be downloaded from our Business Documents Folder. Click on any relevant templates in the list, below, for further information.