If the credit department is doing its job properly, defaults on outstanding receivables should be relatively rare. Nonetheless, it is sometimes necessary to attach customer assets in order to obtain payment. This can be a real problem when a customer’s owners are shielded from liability by the legal structure of their entity – usually a corporation or limited liability corporation (where a member’s legal liability is limited to his or her investment in the business). If so, waiting until you’re filing a lawsuit is a bad time to learn about a customer’s legal structure. A better approach is to alter your company’s credit application so that customers are forced to check off one of two boxes, which are as follows:
- Is your company a proprietorship or partnership?
- Is your company a corporation or LLC?
If an applicant checks off the second box (or checks no box at all), this should flag the attention of a credit analysis, who must then decide if it is necessary to insist in advance on personal guarantees of payment; this would get around the legal walls of an applicant’s corporate structure.
While many companies will already insist on the use of personal guarantees, incorporating a check-off box in the credit application makes it more likely that applications requiring such guarantees will be properly handled.