Advantages and inconvenients of the parent company guarantee
- The implementation of a parent company guarantee is free.
- It requires a precise formalism from the guarantor in order to be valid. The person who signed must have the approval in writing of its Board of Directors otherwise the document is considered null!
- The parent company guarantee provides the same flexibility as the bank guarantee. You normally work with your client with a standard payment term,
- In case of unpaid invoices there are two possibilities:
- The guarantor honors its commitment and make the payment instead of your client,
- In the other case (the guarantor doesn’t want to pay) you will need to start a legal proceeding against him to get the guarantee applied and your Invoices paid.
In case of dispute about the debt (technical problem for example), the guarantor can not be neutral given its own interests to support its subsidiary. The trial will be the only issue with the costs, delays and uncertainties that entails. The cash flow and the net result of your business will be impacted because of financial costs incurred and provisions you will have to take for doubtful receivable.
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Parent company guarantee provides a relative safety. It is often likened to a simple comfort letter. It is important to ensure the credibility of the guarantor and its ability to meet its commitments.
Insist preferably for a payment guarantee on first demand which is more stringent for the guarantor and clearer for the commercial court in case you need to resort to a lawsuit to oblige the guarantor to meet its commitments and honor your debts.
If you work with a credit insurer, it may be more favorable to give you a warranty on your buyer if you have set up a parent company guarantee.