Supplier Agreements: Avoiding Surprises in Tough Times

For many businesses, supplier agreements (or terms of trade) feel like routine paperwork. They’re often signed quickly just to keep things moving. But hidden in these “standard” terms can be clauses that create big problems if cash flow gets tight.

A missed payment, a short-term squeeze, or even a dispute can trigger an event of default. Suddenly, directors may find themselves personally liable, with family assets on the line.

This article outlines the clauses to watch for and what business owners can do to reduce their risk.

Security interests: When “standard” becomes sweeping

Many suppliers now require security interests, usually registered on the Personal Property Securities Register (PPSR). The type of security makes a big difference:

• PMSI (Purchase Money Security Interest): This is limited to the goods supplied and falls away once they’re paid for. Low risk if managed properly.
• GSA (General Security Agreement): This goes much further, covering all present and future company property. A trade creditor may gain control over your business even for a relatively small debt.

On default: A supplier with a PMSI has the right to recover the specific goods it has supplied. On the other hand, a supplier with a GSA can appoint receivers, effectively taking control of the business. Many directors don’t realise they’ve given away this level of power until it’s too late.

Personal guarantees, a common trap

Another high-risk provision often buried within standard Terms and Conditions (T&Cs) is the personal guarantee. Increasingly, suppliers include these guarantees as part of their standard documentation, sometimes without clear separation or warning.

When signing, a director may believe they are executing the T&Cs solely on behalf of the company, but in reality, the guarantee clause may bind them personally as well. The guarantee is often embedded within the main body of the T&Cs, and the execution block is drafted in dual capacity (as both director and guarantor), though this is frequently obscure or poorly signposted.

• A single clause can therefore expose a director to personal liability for company debts.
• If the company defaults, the signing director may be pursued personally for payment.

On default: In companies with multiple directors, the one who signs the T&Cs may find themselves solely liable, with co-directors refusing or unable to contribute.

Suppliers are often entitled to bypass lengthy recovery processes and pursue guarantors directly. In serious cases, this can escalate to bankruptcy proceedings, putting personal and family assets, including the family home, at risk.

Reducing your risk

You can’t always avoid these clauses, but you can take steps to limit exposure:

1. Read the fine print: Always review terms before signing, especially around GSAs and personal guarantees.
2. Negotiate: Try to limit security to PMSIs only and push back on personal guarantees.
3. Engage early: If cash flow tightens, talk to suppliers before defaults occur. Renegotiating terms is easier than facing enforcement action.

The bottom line

A few minutes spent understanding and negotiating terms of trade can save enormous stress later. Protecting your business, and your personal assets, starts with knowing what you’re signing.

How Grayson Clements can help

At Grayson Clements, we regularly review supplier agreements, advise on PPSR registrations and guarantees, and help business owners negotiate safer terms. If you’re concerned about existing agreements or facing supplier pressure, our team can step in early to protect you and your business.

Contact us today to discuss how we can help you stay in control.