Reduce Risk with An Indemnity Agreement

B2B companies face an inherent risk of extending credit to limited company customers. The added risk when dealing with a limited company is company directors have automatic immunity to personal liability on unsecured debt. In other words, if the limited company goes out of business the directors can simply walk away. Indemnity Agreements are a handy credit tool that can reduce this risk while increasing sales.

An Indemnity Agreement is similar to a personal guarantee. The directors agree to personally cover (indemnify) any shortfalls (hold harmless) incurred by the limited company debtor to the creditor. Another limited company, or interested party, can also guarantee payment in the event of a short fall.

Approximately 20% of new businesses fail during the first two years and 45% during the first five years of operation. Often you will be approached by a new company, or start up, to extend them a line of credit. However, the amount they are asking for is too risky, as the limited company does not have an established credit history. Meanwhile, the sales department is pushing hard to get their customer's line of credit approved.

An Indemnity Agreement could be the solution for reducing your risk while being able to finance the sale. Just make credit approval contingent on one or two of the company directors indemnifying payment for the limited company, providing the directors are credit worthy. Most new companies and start ups are used to personally guaranteeing supplier lines of credit.

In many cases you will find that even though the limited company is new, some of the directors will have a spotless credit history with lots of personal assets. If the limited company goes out of business you can recover any shortfall from the director.

An Indemnity Agreement can also prevent any limited company short fall in the first place. Business owners are well aware when their company is going out of business and personal self-preservation kicks in. As the business winds down, they will be sure to pay secured debtors and any creditors they have personally guaranteed.

Here you will find a sample Indemnity Agreement. Please note: This agreement is not to be construed as legal advice. It is recommended to consult a lawyer to make sure your Indemnity Agreement fits your specific industry and needs.

Indemnity Agreements are a handy collection tool.

If you are stressed out by a large receivable for a limited company, an Indemnity Agreement may lower your blood pressure. If the debtor company is looking for a payment extension, allow it, providing a director, or person with acceptable credit signs an Indemnity Agreement.

There are numerous situations where an Indemnity Agreement can improve your position and reduce your risk.