Should you require collateral when granting credit?

If you sell goods or services on credit, it may be appropriate to require collateral prior to granting credit. The purpose is mainly to protect you against the customer's ability to pay, but also against unwillingness to pay.

The extent to which a seller should secure the credit that is granted depends on the credit assessment that has been carried out in advance and the cost risk the seller is willing to take. There is a lot of competition in the market today and if you set too strict requirements, there is always a risk that the sale will go to the competitor.

Legislation allows for various means of collateralisation. What these have in common is that they should preferably be put in place at the same time as the credit is granted, but it is also possible to secure the claim along the way.

Some of the most important hedging tools:

Cause: A guarantee means that the guarantor, through a contract (the guarantee agreement), assumes co-responsibility for the borrower's debt directly to the lender. The guarantor can be held liable for payment if the customer does not settle the debt.

Bank guarantee: A bank guarantee is a surety whereby the bank guarantees the right settlement.

Pant: Armour means that an asset serves as security for the fulfilment of a claim. If the seller obtains a pledge on the customer's asset, the pledgee can demand that the asset be realised if the customer does not pay.

Sales collateral: In the case of a sales pledge, the seller has a pledge on the item for sale until the purchase price has been paid. If the purchase price is not paid, the asset can be claimed back.

Promissory notes: A promissory note is a written declaration of owing money. A promissory note is for a specific sum of money and should contain the debtor's decision that the debt can be recovered without legal action, see section 7-2 of the Enforcement Act. You can then take the claim directly to the bailiff in the event of default, instead of having to go to the conciliation board first.

Commission agreement: A commission agreement means that the supplier retains ownership of the goods delivered to the customer's warehouse until the goods are sold to a third party.

Some practical tips:

• Pay close attention to the conclusion of the agreement. This applies to who you are entering into an agreement with, what is to be delivered and what terms apply to the delivery.
• If you're going to sell on credit, do a credit check on the customer.
• If you're entering into a long-term supply agreement, ask yourself whether you think the supplier will be able to complete the delivery throughout the agreed period. If not, ask for security.

You can read more in the book I helped write:
https://www.universitetsforlaget.no/nettbutikk/krav-pa-penger-uf.html