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.
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.