Delivering services to cash strapped businesses is one of the most delicate and difficult equations.
One of our service provider clients called me last week for advice. Our client had been supporting one of its cash strapped customers who had reached its credit limit. A Director of the customer gave a personal guarantee (verbal) that the outstanding account balance would be paid on an agreed date if our client continued to provide service. Unfortunately the Director reneged and our client is taking legal action against its customer.
It is a sad state affairs when Directors give personal guarantees and then renege, however in these modern times where MP’s can no longer be called honourable and when bankers are being routinely jailed in the US why should we be surprised about a little old personal guarantee default. The depressing part about this little story is that during the most difficult times of business it is trust which get’s businesses through - suppliers cut their customers some slack, bankers extend terms, employees cut their pay. During the difficult times a company in difficulty gets through with the support of its employees, investors, bankers , shareholders and suppliers – all the stakeholders. The strength of relationships forged during these times will endure for many years to come. During these times a contract with the most exacting terms does nothing, companies and their directors rely on the strength of their commitments followed then by their actions. For our client the granting of a personal guarantee could not have been a stronger commitment.
We have been working with many cash strapped customers – helping to manage their cash. We have found that an honest and open communication technique is the best. Do not tell a supplier they will be paid at the end of the month when they won’t, do not say you have lost the invoice when you haven’t . Do part pay invoices. Do pay small amounts regularly. Do have senior members of the management team ring and talk to their suppliers. Do not give personal guarantees and then renege.
This set me thinking about the legal status of a verbal guarantee. It is important to realise that this is an agreement between an individual director and supplier. Verbal agreements do have a legal standing, but there must be evidence that terms have been agreed. The legal advice to our client was that whilst they may have a case to prosecute the individual director for the personal guarantee, it is more straight forward to take insolvency proceedings against the company. It will be interesting to see what happens it is just possible that the director will have greater assets than the company.
