Credit Application and Small Business

credit application small business lawyer

Signing a Credit Application on Behalf of a Company Could Subject You to PERSONAL Liability

Most small business vendors and suppliers require a company officer to sign a Commercial Credit Application or Agreement to buy goods and supplies on account.

Watch out, though!

Carefully examine the language of the Credit Application or you may find yourself personally liable for the debt even if you don’t have any ownership in the company!

In 2011, the Tennessee Supreme Court considered a credit application in  84 Lumber Company v. Smith that contained the following language:

BY SIGNING BELOW I HEREBY … UNCONDITIONALLY AND IRREVOCABLY PERSONALLY GUARANTEE THIS CREDIT ACCOUNT AND PAYMENTS OF ANY AND ALL AMOUNTS DUE BY THE ABOVE BUSINESS….

Mr. Smith signed the Credit Application as “R. Bryan Smith, President.” This manner of signing is typically referred to as signing in a “representative capacity” to denote that it is being executed by the company only, as compared to signing your name without a title to indicate that it is being signed personally.

However, the  Court ruled that the attempt to sign in a representative capacity did NOT  trump the unmistakable language of the Application, and held that Mr. Smith was personally liable for the debt as well.  This same logic would presumably apply not just to company presidents like Mr. Smith but also even to junior employees who might have signed such an agreement.

Credit Application Best Practices

So what should you do if faced with this situation?

  1. Strike through offending language. In order to avoid personal liability, you would at a minimum need to physically strike through the personal guarantee language AND then also sign the document in a “representative capacity” (i.e. name + title).
  2. Make an Informed Decision.  Many suppliers and vendors require a personal guarantee in order to do business, and so you may have to decide whether to go ahead and sign the agreement, shop around, or try to negotiate a better deal (e.g. perhaps provide for a maximum limit on the guarantee, or secure a bank letter of credit instead, etc.). At least you will be making an informed decision.
  3. Ask a “Higher Up” to Sign. If you’re just an employee or junior officer of the company then you should probably take the agreement to a superior to make certain that the right person is signing the agreement. A regular employee (i.e. someone with no ownership interest) should not fairly be expected to personally guarantee the obligations of his or her employer.
  4. Go see an attorney! The above tips are intended only as general legal advice. Each agreement, contract, and situation is different, and you should seek legal advice tailored to your specific situation.

We are Small Business Lawyers.

Check out our team at Wiseman Bray PLLC.  If you need help with your small business contracts, agreements, or forms, or if you have a question about business litigation, please call us at 901-372-5003 or email us here. We have offices in Memphis and Nashville TN.