Opening a distributor account: credit terms and personal guarantees to read first

Why the account paperwork deserves a careful read

New owners often get the application from a sales rep during a busy opening week and sign it with the health permit paperwork. In a short r/restaurantowners post, a new owner opening an account with a vendor asked whether a term in the application was normal. Only a search excerpt and the title were recorded, so this article doesn't speculate about which clause they meant. The question itself is the right instinct. The terms in that packet decide who owes the money if the business can't pay, how fast the balance grows, and what the supplier can do to collect.

This article explains what to look for and what to ask. It isn't legal advice, and the enforceability of many clauses depends on state law and the exact wording. Where it matters, it says so.

Typical sections of a credit application, and what each can commit you to

Applications differ by supplier, but most combine several of the parts below. Read the whole packet, including the small-print terms on the back or in a linked document. The table is a reading guide, not a list of what every supplier includes.

Personal guarantees: the clause that follows you home

Forming an LLC or corporation generally separates business debts from personal assets. A personal guarantee is an agreement to give up that separation for this account. If the business doesn't pay, the supplier can pursue the person who signed the guarantee, subject to the guarantee's wording and state law. Many guarantees are written as continuing guarantees. They cover all future purchases, not just the first order, until they're revoked in writing according to their terms, and revocation may not cover debts already incurred.

Suppliers ask for guarantees because a new restaurant has no credit history. That's understandable, and some suppliers won't open terms without one. But the scope is often negotiable. Options worth requesting include a dollar cap matching your expected credit limit, a release after a set period of on-time payment, a guarantee limited to one signer rather than every owner and spouse, or COD terms with no guarantee at all. Read whether the guarantee lists you as an individual or in your role as an officer. If the signature block is ambiguous, ask the supplier to clarify in writing and consider legal review.

Payment terms and late charges: calculate your real exposure

Net terms feel like free credit, but they also set how much you can owe at once. Work it out from your expected order pattern, not the credit limit on the form. Pay attention to whether "net 14" is counted from the invoice date or the delivery date, how weekends are handled, and whether a late payment on one invoice puts the whole account on hold, which can stop deliveries during service.

Late charges are usually stated as a monthly percentage. A charge that sounds small per month adds up over a year, and collection or attorney fee clauses can add more if a balance goes to collections. The enforceability of rates and fee clauses depends on state law. What you can control is knowing the number before you agree to it and setting up payment so you don't trigger it.

Worked example: how big the balance gets on net 14 (hypothetical)

All numbers here are invented. A new restaurant expects one delivery a week of about $6,000 and is offered net 14 from the invoice date. The week 1 invoice is due on day 14. By then, the week 2 invoice has also arrived, and the week 3 delivery may land that same day. Just before the first payment clears, the open balance can reach about $18,000: three weeks of purchases. If the restaurant has signed an unlimited continuing personal guarantee, that's roughly the minimum personal exposure in normal operation. It grows if payments slip or order volume rises.

Now suppose cash is tight one month and $12,000 runs past due. At a hypothetical service charge of 1.5 percent per month, that's $12,000 × 0.015 = $180 for the month, equivalent to 18 percent a year if it continued. That's before any collection costs the agreement may allow. Knowing these two numbers changes the conversation. The owner might ask for a guarantee capped at $20,000, or accept net 7 with a smaller exposure, or set up automatic payment on the due date so the late charge never applies.

After buying an existing restaurant

When you buy a restaurant, the seller's distributor accounts are usually in the seller's entity name, and often backed by the seller's personal guarantee. Continuing to order on that account after closing creates confusion over who owes what, and can leave the seller guaranteeing your purchases or you inheriting the seller's unpaid balance. Open new accounts in the name of your own operating entity before or at closing, and ask each supplier to close or transfer the old account in writing.

Settle supplier balances in the purchase documents. The purchase agreement should say who pays invoices for goods delivered before closing, and whether opening inventory is included in the price. Ask the seller for a list of open supplier accounts and recent statements, and confirm balances directly with each supplier before closing. Any security interests a supplier holds in the business's assets should be identified and released or dealt with as part of the transaction. Your attorney can explain how that's checked where you're located. Don't assume the seller's negotiated pricing or contract terms transfer to you. Many supplier agreements can't be assigned without consent, and your new account may be priced from scratch.

For the seller, the main step is ending their exposure. A seller who signed a continuing guarantee should revoke it in writing according to its terms once the account is closed or transferred, and keep proof that the supplier received the revocation.

Checklist before you sign

Run through this list with the full application in front of you, not the sales summary. If you can't answer an item from the documents, ask the supplier to answer in writing.

• Is the account in the name of your operating entity, with the correct tax ID?
• Is there a personal guarantee? Who signs, is it capped, and does it end or allow release?
• Do net days run from invoice or delivery, and what happens to deliveries if one invoice is late?
• What is the late charge, and is there a grace period?
• Are you agreeing to pay collection costs or attorney fees?
• Is there a security interest, and in which assets?
• Can the supplier change terms by notice, and how is notice given?
• Which state's law governs, and where would disputes be heard?
• If you bought the business: are the seller's accounts closed and balances allocated in writing?

When to get legal review, and what to keep

Get an attorney to review the paperwork before signing if the guarantee is unlimited and continuing, if the security interest covers all business assets, if there are clauses waiving notice or rights or consenting in advance to a judgment (the enforceability of these varies by state), if the supplier will be a large share of your purchasing, or if the account is part of buying an existing business. Short reviews of standard supplier paperwork are often modest in scope, but a fee estimate is something to ask the attorney for, not something this article can quote.

Keep a signed copy of everything: the application, the terms and conditions as they read on the day you signed, the guarantee, any written changes the supplier agreed to, and correspondence about terms. The common failures are signing a guarantee nobody remembers, losing the version of the terms you agreed to, ordering on a previous owner's account, and treating a late-payment clause as something that will never apply.