What About A Personal Guarantee? – Michael Dennis, CBF

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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Kudos to CMA’s Accounting Department

Recently, CMA’s office supplies vendor held a contest to recognize its clients’ accounting departments. Diana Escobar, CMA’s Operations Administrator in Burbank, submitted the winning essay describing why CMA’s accounting department deserved the prize. Here is a picture of CMA’s Accounting Department enjoying their reward – a free lunch provided by Ron Lasley and Cathy de Leon of Economy Office Supply (Cathy even brought home-made cupcakes!).

CMA's Accounting Staff - click to enlarge
Pictured from left to right: David Macomber, CPA (Vice President and CFO), Cindy Briceno (Accounts Receivable), Edgar Velasquez (Accounting Clerk), Michael Hansen (Systems Administrator), Clara Lucas (Accounts Payable), LaDeva Shaw (Adjustment Bureau Bookkeeper), Cheryl Lloyd (Senior Accountant), and Pratana Thammasatit (General Bookkeeper).

On behalf of the entire staff of CMA, I would like to take this opportunity to thank the folks in the Accounting Department for all they do to keep us running, and kudos to Diana Escobar for taking the initiative to write an essay recognizing their extraordinary efforts. Economy Office Supply published Diana’s winning story in their own online newsletter:

Winning Story for the Accounting Dept.:
Credit Management Association (CMA) is a non-profit association that has served business to-business companies since 1883. CMA helps credit, collection, and financial decision-makers get the information and support they need to make fast, accurate credit decisions.

CMA’s Accounting Department consist of 8 individuals including the CFO bookkeepers and IT personnel who handle everything and anything that has to do with money and programming. These 8 people have been the longest standing employees for CMA with more than 100 years combined and one person having more than 30 years of experience working for CMA. They handle all accounting for our other remote locations as well. Everything goes threw them and they are very strict individuals who work very hard for the company with very little recognition.
CMA is an association with a major focus on our members we hold a lot of functions, seminars and events for the members to network. Plenty of times departments are invited to join in on the events but unfortunately the accounting department hardly ever goes as there is always a reason to stay behind and run things smoothly.

I believe CMA’s accounting department deserves some type of recognition and know that we [everyone else at CMA] appreciates them for their hard work. I hope to hear from you that our Accounting Department has won as they deserve the lunch away from the office and especially deserve the recognition.

Diana E.

More pics from today’s lunch:

Accounting Department and Economy Office Supply
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