Building Trust Through the Credit Application

Personal Guarantee and
Permission to Contact Can Mitigate Risk

While establishing trade credit is the lifeblood of many small businesses, extending credit to new customers requires a leap of faith.

Will they pay on time — or at all? Do you run the risk of bad debt draining your time and resources?

There is a tool that can help you mitigate risk while also embracing a growth mentality for your business: a comprehensive credit application that includes a personal guarantee and permission to contact.

What Is a Personal Guarantee?

A personal guarantee is a pledge that the business owner, partner, or primary executive will repay the debt if the company defaults on its obligation. Typical assets used as collateral for a personal guarantee include checking accounts, savings accounts, real estate, and vehicles.

Benefits to the Creditor

For the business that extends credit, the benefit of including a personal guarantee in a credit application is relatively straightforward. A legal claim to the business owner’s assets mitigates risk for creditors, incentivizing them to accept new customers with minimal or no credit history — or even a bad credit history.

By agreeing to a personal guarantee, the customer is building trust with the creditor. They’re demonstrating not only a commitment to pay but also a willingness to assume substantial personal risk for the sake of moving forward with the business relationship.

The creditor, in turn, can rest easy with each sale to the new customer while also increasing his company’s risk tolerance and potential for consistent growth.

Benefits to the Debtor

On the surface, a personal guarantee may not seem appealing for the business assuming the debt. Why would business owners accept personal risk by placing their capital and property on the line?

For many new or relatively young businesses, the risk is indeed justified. A personal guarantee allows a business with an inadequate credit history to qualify for a loan. It also provides a low-cost mechanism for obtaining the funds necessary for growth.

In this relationship, trust goes both ways. Just as the debtor builds trust by putting its assets on the line, the creditor builds trust through its willingness to work with a new and unproven customer. Establishing a solid foundation of reciprocal trust increases the likelihood of a fruitful long-term partnership.

Permission to Contact

Within a credit application, ensuring that the debtor agrees to be contacted via several forms of communication — mail, phone, email, and text — provides an additional layer of security for the creditor in the event of a delinquency. Be sure to gather each business owner’s personal addresses, phone numbers, and email addresses at the outset of the transaction so that you aren’t scrambling for contact information later.

Delinquent customers may resort to “ghosting” — withdrawing from communication without an explanation. This is less likely to occur if they grant you permission to contact them upfront. With multiple communication channels at your disposal, stalling debtors will receive regular reminders of their financial obligations — not only from you but also from a persistent collection agency.

Comprehensive Information

Beyond including a personal guarantee and permission to contact, a thoughtfully developed credit application that contains all the information needed to effectively evaluate your customer’s creditworthiness will also strengthen your credit risk management system.

Resist the temptation to use a generic credit application form. Your business is unique, so be sure to include information particular to your industry along with standard data found on most credit applications.

At a minimum, ensure the applicant includes the employer identification number (EIN) and the social security numbers of all registered agents (for the personal guarantee). But don’t stop there. You’ll also want the last two years of the company’s financial statements. You may encounter some pushback on this request, but it’s reasonable, considering you’re helping finance this business.

Need Help?

Are you looking for expert assistance designing the strongest possible credit application? Do you want to save time implementing a new application system for prospective customers?

BARR Credit Services can create and then host your credit applications for a nominal fee. We’ll help ensure your new business relationships are built on a solid foundation of trust.

Sources:
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The Business Therapist