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100% Personal Guarantee

A friend recently told me that following a heated discussion regarding the creditworthiness of an applicant, the salesperson involved told my friend and the company CFO, “I am convinced this company is solid and I will sign the personal guarantee if that is what it takes to get this customer an open account.” The CFO took him up on his offer. He said, “I am sure the CFO’s decision surprised him because it sure surprised me.”

I was in the process of giving my friends a telephonic high five when the practical implications of this arrangement started to nag at me. I asked if he could explain how the process worked. My first question was: What credit limit does the customer need? The next was: What credit line did they qualify for? The third was: How did you assess the creditworthiness of the salesperson? The answers I received were: This new account wanted a $200,000 credit line. Without the guarantee, I doubt we would have extended more than $25,000. We did nothing to qualify the salesperson for $200,000, but quickly added that they had his signed guarantee on file.

Since everyone has heard that a personal guarantee is only valuable to a creditor to the extent that the guarantor is creditworthy. I shared this concern with my friend, and he agreed that this was a legitimate issue that should have been raised before the guarantee was accepted.

The more I thought about this practice, the more problematic it seemed to get. For example, I wondered if a Court would enforce this type of guarantee, or would find that the salesperson did not receive “adequate consideration” for his pledge. I wondered if employment laws at the state or federal level would prevent the company from enforcing the guarantee through any form of wage garnishment.

I thought about the precedent the credit department had established, and wondered how many more salespeople would be willing to offer up their personal guarantees in the future. I thought about the adversarial proceedings that the credit department might have to initiate against the salesperson/guarantor, and about the damage this could do to the overall working relationship between sales and credit. I came to the conclusion that what appeared at first to be a bold decision that forced the salesperson to put up or shut up was fraught with risks.

Michael Dennis, CBF

I think this is a reminder that unless we take time to consider issues carefully, cautiously and from many different angles, we may put our company at risk.

Michael Dennis’ Covering Credit Commentary. Michael’s website is  www.coveringcredit.com

The opinions presented are those of the author.  The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors.  Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.

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5 Responses to “What About A Personal Guarantee? – Michael Dennis, CBF”

  1. Rich Johnston says:

    I have often asked the salesperson if he would be willing to sign a guarantee and an agreement to deduct any unpaid portion from his monthly commission check should the customer not pay. Not for amounts as high as the one in your example, but for $10,000 or less. I have only had one salesperson over 13 years take me up on the offer and just one time. Most of the time they go back to the customer and get the additional information I requested or the deposit check. But I do keep the form handy to quell the argument and it usually works. Usually the salesperson is not dumb enough to guarantee any amount for a customer, however desperate they are for the sale.

  2. Michael Zininberg says:

    Well, for once I agree with you.

    I’m kidding of course. Getting the guarantee signed is the easy part. Finding a way to enforce it if necessary is far more complicated. It think now is the time your friend asked an attorney if the PG is enforceable…before someone else comes knocking wanting the same arrangement.

    I would not like to be your friend if he or she has to start evaluating the creditworthiness of fellow employees, especially if he/she has to tell a salesperson their personal guarantee is not good enough to extend credit to a customer.

  3. Margaret Spencer says:

    I agree with Rich and his approach. I used this technique often, and was usually rewarded with the salesperson balking as soon as I produced the actual guarantee. I used to tell the salesperson: Just sign your name at the bottom. I will witness your signature, fill in all the blanks, and send you a copy of the signed guarantee by the end of the day.

    Like Rich, I used to limit the offer to applicant companies that wanted a few thousand dollars of credit. I wouldn’t make the offer on a $200,000 line out of concern that the salesperson just might sign it.

    I hadn’t thought about whether the contract would be legally enforceable. That is an interesting slant on this issue. Thanks for sharing the story.

  4. Bob Shultz says:

    Interesting scenario.
    I have encountered enforcing collection from company employees several times. As an example, a division CFO came to me with a pile of bounced checks received as payment for company product. They were all from current and former employees. He was lathered up and wanted my department to find the perps and collect the money.
    We began to actively pursue the amounts owed. About a week later the same CFO called me to “take off the dogs” It seems that it was politically uncomfortable and he would rather take the hit.
    All my other experiences had similar endings. Not a good plan to seek a personal guarantee from an employee, particularly considering the challenges of ultimate enforcement.
    Extending credit to a company that is not creditworthy happens all the time. Your company may make a perfectly valid business decision to take the risk. The key is that the right decision makers are involved based on the materiality of the risk.
    The approach I have always taken is first to escalate the decision, with my opinion, to the appropriate level for review. This includes both Sales and Finance management and sometimes all the way to the CEO.
    If the resulting receivable would be so speculative that it could result in a write off then we would require a corresponding reserve be established. The transaction would not show as revenue or be commissionable until paid.
    Amazing how few were actually pursued by Sales under those circumstances. For two reasons. Who wants to stick their neck out with senior management review on a silly deal. Secondly, “No immediate commission”?
    I never said no and kept the door open to get the revenue if the company made the business decision to go for the deal.

  5. Michael Dennis says:

    Thank you for your responses. Special thanks to Bob Shultz for his detailed analysis and additional recommendations for readers.

    Michael Dennis

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