Written by Robert Garofano in June, 2008

According to one legal professional, an effective yet under used strategy for organisations to reduce the risk of incurring unpaid debtors, is to insist Directors agree to personal guarantees over the debts their Company incurs.

Director guarantees allow a Creditor to recover unpaid debt from the Director personally, should the Director’s Company be unable to meet the repayment.

Personal guarantees are a powerful incentive to make sure that when a Company is faced with difficult times; those debts holding a personal guarantee are prioritised.

According to one source, Director Guarantees are used very little because organisations are either unaware of them or concerned about losing clients due to an increase in terms of trade.

During promising economic conditions, poor credit management often gets overlooked resulting in detrimental consequences for the organisation when the economy deteriorates.

Below is a summary of tips that organisations can implement to manage credit risk:

• Insist on Directors signing personal guarantees;

• Obtain a registered charge over an asset held by the customer;

• Develop a credit risk profile for each customer and implement credit risk policies (eg. ‘Bad’ payers may be required to supply greater security);

• Thoroughly screen prospective customers and do not assume a standard trading agreement will suit every customer;

• Implement an effective Retention of Title (“ROT”) clause in any sale of goods contract, ROT clauses provide that the seller retains ownership of the goods until full payment has been made by the debtor. The seller can therefore recover the goods should the debtor default on payment;

• Take out Trade Credit Insurance from a recognised provider.