One of the biggest points of confusion when extending credit to customers on behalf of their businesses is whether to define your agreement as being with the individual or their company. This might not seem like a big deal in the moment when you are eager to book a big sale, but it can be the loophole that gets them out of their obligation to pay you if you aren’t careful.
Corporations vs. Individuals
Before we dive into whether you should extend credit to individuals or the companies they represent, we should first explain that the two entities are very different in the eyes of the courts. Corporations are actually viewed by the courts and the laws as unique entities that are entirely separate from the individuals they employ.
When a person is conducting business on behalf of a corporation, they are seen as an agent of that company. The deal you make with that person, however, is between you and their business. Should another agent replace them, your deal is still with the company.
Differences on Delinquent Accounts
As long as the individuals and companies that you are working with live up to your agreement, you have nothing to worry about. But if things head south and money gets tight, the way that your debt agreement with them is structured could become the deciding factor in whether or not you get paid.
When an account falls into delinquent status and you are forced to initiate collection efforts, you are only able to collect from the entity that you made the original deal with. If your deal is just with the corporation and that corporation files for bankruptcy, then you have no legal right to pursue the people from the company that you made the deal with.
Adding a Personal Guarantee
The solution to this loophole is to insist that any representative you are considering for credit terms also signs a personal guarantee on whatever credit you are planning to extend to them. This will entitle you to go after them personally if their company fails to meet its debt obligations as agreed upon.
Many people will object to this as an unnecessary complication for simple credit terms, and they may have a valid point there as long as they represent a reputable company that stands to lose a great deal if they should fail to meet their debt obligations. But you could also argue that anyone who is credible enough to deserve your credit for their company should be more than willing to personally guarantee that their business will fulfill the obligation that they are making to you and your company.
The Personal Guarantee Bonus
There is a special bonus that comes with obtaining a personal guarantee for any corporate credit you choose to extend. If a company falls on hard times and is unable to fulfill its obligations, the natural instinct of anyone running that company will be to make good on the debts they are personally obligated to pay first and foremost.
So if the company you extend credit to suddenly becomes a sinking ship, that personal guarantee ensures that you will have a place on one of the first lifeboats.
Whether we are talking about individuals or corporations, extending credit to customers is always going to be a business practice that comes with some risk. However, just like you would want every renter in an apartment to sign a lease and put down a security deposit, you want to have as many cosigners as possible on any credit terms that you extend to improve your business. There is always going to be safety in numbers.