Know the Rules – Extending Credit

  collection   Feb 03, 2015   Uncategorized   0 Comment






We have a customer who is asking us to change our billing and contact information to her company name.  Does it make a difference?  Should I have her sign new financial forms?

It may make a big difference, particularly if you are extending credit to this customer.  If this customer’s company is a corporation or an LLC (limited liability company), the change she is requesting will affect your ability to recover any unpaid balance.  It sounds like you already have a signed agreement with  your customer for payment.  That does not mean you have a signed agreement with her company.

Under the law, a corporation or an LLC is considered to be a separate legal entity capable of contracting for services.  For example, if your agreement is with Julie and Julie fails to pay as agreed, you could pursue Julie under the terms of your agreement.  You don’t have a right to pursue ABC Corporation, even if Julie is involved with that company.  The reverse is also true – if you have an agreement with ABC Corporation only, you don’t have the ability to pursue Julie (except in very limited circumstances).

I recommend that you have your customer sign a personal guaranty.  A personal guaranty is an agreement by an individual to pay the obligations of another entity.   Guaranties can be a separate agreement or a provision within an agreement.  Important elements are as follows:  clearly identify the entity (ABC, LLC), include a statement that you are conditioning the extension of credit on a valid personal guaranty, and  include a statement that you may proceed to collect against either the business entity or the individual.

It is not enough to have a good form – as always, make sure that your staff has training on how to fill out the personal guaranty.  The personal guaranty must name the correct entities in the correct capacities and have the correct signatures.  For example, it is not effective to have a personal guaranty of company obligations where the person signing the guarantee signs in their corporate capacity, for example, Fred Jones, President of ABC Corp.  Instead, he would need to sign as Fred Jones.

Whenever you extend credit to a business entity, I suggest that you require a personal guaranty.  If the individual is not willing to provide that guaranty, then you have a business decision to make about whether to take on that risk and extend credit. 

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