Accounting Best Practices, Fifth Edition

7–39. Require Intercorporate Guarantees

A credit manager is sometimes confronted with a situation where a customer does not have a good credit record and its managers are hired staff who have no intention of adding their personal guarantees to an order. Is there a way to still grant credit?

It is possible that the company is a subsidiary of another corporate entity. If so, request that the parent company issue a guarantee making the parent liable for the subsidiary’s debt. If the company chooses to exercise this guarantee, it is customary to warn the customer that the company intends to contact the guaranteeing entity, not only as a courtesy, but also because this makes the customer more likely to pay.

This approach calls for the examination of the parent’s credit in place of the subsidiary, so an additional credit review must be conducted. Also, this type of guarantee may be unenforceable if there is no obvious consideration given to the guaranteeing entity in exchange for its guarantee. If this may be a problem, clearly specify the form of consideration given within the guarantee document. Further, review the guaranteeing company’s board minutes, articles of incorporation, or bylaws to see if it is authorized to grant a guarantee—if not, the guarantee is unenforceable.

If the guarantee is granted, be sure to store it in a locked file for safekeeping, and make note of the guarantee in the customer file.

Cost:

Installation time: