It is risky to conduct business with businesses and individuals you do not know well. Involving large amounts of money makes the transactions a higher risk. Relying on the word of those involved and gut instinct is not enough. Targeted inquiries about those involved and due diligence are important when entering into commercial transactions.
-Assignment of a lease
-Subletting (allowing a third party to take over the lease)
-Hiring and purchasing
Do Your Research
The risk of losing cash flow and harm to the business can be reduced by doing your research. Thoroughly checking the credentials of the borrower or tenant will help determine if it is a viable deal. You want to know that the potential client has experience with business, good cash flow and a backup of cash. This will help ensure they can make good on the terms financially.
Information and Inquiries
-Statements for bank accounts
-References – Check them to ensure they are accurate and exists
-Referrals – Attempt to locate businesses and individuals that you are familiar with
-Search for bankruptcies – These can be a red flag
-Business experience – You will need to know their areas of expertise and success rate
Getting references is part of the process. Checking these references is more important than just getting them. You want to verify that they are real and that they can provide insight into who you are planning on entering business dealings with. Positive referrals and a good business reputation are assets in business transactions.
A search of the entity entering into the lease or loan agreement should be done to ensure you know everything possible about them. It is important to determine who the shareholders and directors of the company are to get a complete picture of the structure and financial aspects. It is common to request personal guarantees from shareholders and directors during commercial transactions including loans and lease agreements. This is to ensure that losses are covered.
Limited Liability of Companies
Tenant companies can be started on the spur of the moment without cash flow or assets. These fly by night companies could vanish when something goes wrong and leave you with no recourse against them. The landlord is limited in the ability to recover losses from a company because of limitations in liability. It is easier to recover losses from the individuals backing the company financially. This is important when the security deposit, typically an amount that covers rent from one to six months, does not cover the expenses.
Personal Guarantee Disadvantages
The enforcement of personal guarantees can be costly and take a lot of time to get. There are legal proceedings involved in the environment which is where most of the expenses come in. Avoiding this can be done by negotiations of a larger security deposit instead of getting personal guarantees. Security deposits are limited amounts, but they are easier for landlords to gain access to in the event something goes wrong.
Educating yourself about the entity that you are entering into a business arrangement is important to protect yourself and your company. The available assets and financial backing of the company are important to examine to make sure that you can recover losses if something goes wrong with a commercial lease agreement nsw.