Don’t Get Stuck Between a Rock and a Hard Place – Michael Dennis, CBF

Don't Get Stuck

Sooner or later, every credit professional will be asked this question by their boss: “What credit limit do you recommend we assign to this customer or applicant — the one with the deficit net worth?”

Customers with a deficit net worth are technically insolvent, and insolvent companies have a nasty habit of filing for bankruptcy protection. There is no good or right answer to this question. The answer depends on your company’s tolerance for credit risk. However, the fact that your manager is asking you for a recommendation suggests that s/he believes the customer should be given open account terms at some dollar level.

I use one of two approaches to address this problem. The first involves rephrasing the question this way: “If you are asking how much credit I would extend to a company that is technically bankrupt, the answer is that I would not recommend open account terms.” This response is honest and direct, and makes your position crystal clear.

The other approach involves explaining that your experience does not provide you with any guidelines relating to recommending credit limits for customers with a deficit net worth, and that you would appreciate their help. Ask for their guidance about what process they would use to determine how much money your company is willing to risk on this type of customer. Done correctly, this can become a useful training tool for the credit decision-maker.

Both approaches might cause your manager to question your willingness to make tough decisions. The good news is that you may be able to avoid the problem altogether by updating your Policies and Procedures Manual. If you develop a Credit Policy that addresses who has the authority to extend credit to the highest risk companies, and what facts and factors that credit decision will be based on, you can avoid being caught between a rock and a hard place.

Michael Dennis, CBF

I am always interested in hearing your opinions. Please let me know how you have handled this challenge effectively.

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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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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