We had a recent inquiry from a prospective customer with poor business credit wanting to use a $10K cash bond to secure a line of credit with us. Can you point me to any information addressing this option? I have never heard of doing this before.
Stumped in Sturgis
Your compass just landed on yes! This is the credit version of Christmas, your birthday, and having lunch with Big Foot all rolled into one fabulously shiny gift from the credit Gods. Let me just recap what I read: A customer shows up on your doorstep, tells you up front they have a sorry credit history, offers to put up a cash bond to secure a line of credit with your company and you have questions?
My apologies if that was a bit over the top. I can actually understand you questioning this inquiry. It happens so rarely that most credit managers never get a chance to entertain this type of dilemma. Usually it is us credit folks coming up with creative and sometimes unusual options to try to get a challenged account open—asking for a personal guarantee, cross corporate guarantee, bank letter of credit, first born (you get the idea). So when someone comes to the table with a challenge and a solution, credit eyeballs suspiciously look for the “catch.” We are a cautious and trust-impaired group.
I believe the verbiage is what is tripping you up. A cash bond is usually an arrangement in which one party (in this case the credit-impaired potential customer) gives another party (in this case your company) a set amount of money to secure the fulfillment of an obligation. In the event party number one fails to comply with the obligation, the money is forfeited to party number two (you).
What you are really doing is holding the money in “trust” at your company. Everyone wins. The customer gets a line of credit and the opportunity to help rebuild their poor credit history, and you get a new customer and additional sales.
Your customer may be referring to a letter of credit from a bank, with your company as the holder. That will cost the customer a small fee, and to collect on it you will have to make a formal request and jump through a hoop or two in order to get your money if it comes to that. I would ask the customer to clarify exactly what his definition of a “cash bond” is.
The two of you can then set the ground rules for how you are going to move forward with everyone understanding the set up, the expectations and when the trigger needs to be pulled on paying the account balance with the “cash bond.” For instance: The $10K is held as your bond or collateral, as long as the customer is paying his account within terms, the $10K remains in trust. If the account goes past due (and this is where you will need to set the expectation), then the $10K is used to pay the debt and breaks your agreement.
Is the understanding the customer will have $10K line of credit with you or are they expecting you to match that and give a $20K line?
If you both agree that if the account goes 30 days past due, you will use the cash bond to pay the account and move it to your COD program, what is the communication with the customer? I strongly recommend putting everything in writing upfront, prior to any materials rolling out the door. Write up an agreement, sign it, have the customer sign it, and make sure everyone gets a copy.
With more than 30 years of credit management experience in the LBM industry, Thea Dudley consults with companies on a wide range of credit and financial management issues. Contact Thea at email@example.com.