Cheque, guarantee or deposit: what to give a supplier

Give a deposit if you have the cash, a guarantee if you have the standing, and a cheque only if you are certain of the date. The cheque costs nothing today and the most on a slow month. Before you agree to any of the three, ask him for a smaller account instead.

Why he wants something in his hand

A supplier who gives you thirty days to pay is lending you his own money. He paid for those goods before they reached your shelf. If you do not pay him, nobody makes it good.

So when a new agency asks for a cheque, a guarantee or a deposit, he is not insulting you. He is asking the only question available about a shop he has never traded with: does this man treat his word as a real thing?

An old supplier does not ask, because he has watched you pay on the day for two years. That is worth more than any paper, and it is why the question disappears once you are established with him.

Half past eleven on a Wednesday. Tariq has bought cooking oil from the same agency for six years, cash on delivery. A new agency's man is at his counter with a rate that is Rs 40 a tin better and thirty days to pay. Tariq is doing the sum in his head and it is good. Then the man says the line: "Just write a cheque for the amount, dated the thirtieth. It is only paperwork."

It is not only paperwork. It is the most expensive of the three things he could have asked for, and Tariq is about to hand it over without asking for anything else.

The cheque, and the date written on it

A cheque is not a promise. It is a promise with a date on it, and the date is the whole problem.

Your money does not arrive evenly. It comes in a rhythm nobody controls: a good week, a dead week, one customer who clears Rs 30,000 unasked and four who need three visits each. A dated cheque knows nothing about that. It asks for the full amount on one named day, whether or not your recovery came in.

On a normal month that is fine. You pay on the day, the paper is never used, and everybody forgets it existed.

On a slow month it takes away the one thing that keeps a small shop alive, which is being able to say "give me eight days". With a cheque in his drawer, that talk happens on his terms, on his day, with your paper in his hand. You are no longer asking for time. You are asking him not to use what you already gave him.

That is the real cost of a cheque, and it is not a rare event. Every shop has three or four slow months in a year.

If a cheque is what it takes to open the account, there are three lines you never cross, whatever else you agree to.

If you do give a cheque

✓Do this

• The exact amount of the delivery in front of you
• A date set a few days after your own collection comes in
• A note in your own book of which order it stands against
• Collect it back the day the account is settled, and mark it returned

✕Never this

• Never blank, on the amount or on the name
• Never undated, however he explains it
• Never more than the goods you are taking
• Never a second one while the first is still with him

Never blank. Not the amount, not the name. A blank paper is a promise with no size, and size is what protects you.

Never undated. An undated cheque is the same promise with no day on it, which in practice means every day. You cannot plan around it, because there is nothing to plan around.

Never more than the goods. Not "round it up", not "keep it higher for the next order". The paper covers the delivery in front of you and nothing else.

If one of those three is the thing he insists on, the answer is a smaller order, not a bigger promise.

When another shopkeeper stands for you

The guarantee looks free, and that is exactly why shopkeepers reach for it first. No cash leaves the galla. There is no date anywhere. Somebody you know says a sentence to somebody he knows, and the goods arrive.

What it actually costs is a relationship, and it is usually the one you can least afford to spend.

Understand what has happened. Another shopkeeper has put his name behind your month. If you pay on time he never thinks about it again. If you go two weeks late, the supplier telephones him and not you. Now a man you buy from, sell to and stand with every evening holds an opinion about your money.

That opinion travels. A market is a small place, and a shopkeeper who has been let down tells three people without meaning any harm by it.

So keep the rule narrow. Use a guarantee for an account you are certain of, from a person whose good word you can return, and tell him the size and the day before he agrees. A guarantee given on half the facts is how a good relationship ends.

The same question comes back from the other side. When somebody asks you to stand for him, he is not asking a favour, he is asking for a number. Ask what the account is and what he pays in a month, and if you would not have given that man that much udhaar across your own counter, do not put your name on somebody else's version of it. The test for asking a guarantor works in both directions.

The deposit, and the day it ends

The deposit is the dearest of the three on the day you pay it and the cheapest every day after that.

Say he wants Rs 25,000 held against a Rs 80,000 account. That money leaves your hands and does nothing. It buys no stock and serves no customer. For a shop that counts its cash carefully this hurts, and most shopkeepers refuse for that reason.

But look at what the money bought. No date hangs over you. Nobody else's name is behind yours. On a slow month you go to him like any other customer and ask for time, and he decides on whether he wants your business, not on a paper in his hand.

It also ends. A cheque has to be asked for back. A guarantee sits in a man's memory long after the goods are sold. A deposit comes off the account, and when you stop dealing it returns to you or pays the last delivery.

It suits a shop with cash and thin relationships: a new shop, a market where nobody knows the owner yet, a shop that has just moved streets. If you have the money but not the years, offer this one, and offering it before he asks changes the whole conversation.

The three of them, side by side

Getting out, and what a bad month does

How easily you get out of itWhat it costs if things go wrong

A post-dated chequeHow easily you get out of itOnly when he hands the paper back, and you have to go and askWhat it costs if things go wrongThe most of the three. One fixed day, and the talk is on his terms

Another shopkeeper's guaranteeHow easily you get out of itIt ends when the account ends, but his memory of it does notWhat it costs if things go wrongA person you needed in the market, and a story that gets repeated

A deposit on the accountHow easily you get out of itIt comes off the last bill, or back to you, when you stop dealingWhat it costs if things go wrongThe least of the three. Your own money returns and nothing hangs over you

Read those rows against your own shop. The question is not which is best. It is which one you could carry through the worst month your shop has had, because that is the month it gets tested in.

If your recovery is steady and you know your dates, a cheque is survivable. If it moves about, the cheque is the worst of the three by a distance, and a deposit is the quiet answer. The guarantee belongs to shopkeepers with real standing and a small, certain account, a much narrower group than the number of guarantees given.

Ask for a smaller account instead

Here is the part most shopkeepers never try. The terms are not fixed. A supplier who wants your business has four other things he can take instead of a cheque, and he will usually take one, because all four make his money safer as well. Nobody asks, because the offer feels like the offer.

Four things to ask for before you agree to any of the three

1. 1A smaller first orderRs 30,000 instead of Rs 80,000. It answers his worry as well as any paper does, and it costs you nothing.
2. 2A shorter periodFifteen days instead of thirty, on the smaller amount. Short and small is far easier to pay than long and large.
3. 3A part paid at the doorA third on delivery, the rest in three weeks. Real money the same day is worth more to him than a promise.
4. 4The account built up in three stepsRs 30,000, then Rs 50,000, then the full Rs 80,000. By the third order he holds nothing, because he has watched you pay twice.

Take a smaller first order. Rs 30,000 instead of Rs 80,000. If he was worried enough to want a cheque, a smaller number settles that worry as well as your paper does, and costs you nothing.

Take a shorter period. Fifteen days instead of thirty, on the smaller amount. Short and small is far easier to pay than long and large, and it looks better to him.

Pay a part at the door. A third on delivery and the rest in three weeks. He has real money in his hand the same day, which beats a promise, and you keep your room to move.

Build the account up. Rs 30,000 in the first month, Rs 50,000 in the second, the full Rs 80,000 in the third. By the third order he is holding nothing, because he has watched you pay twice. Nearly every long supplier relationship started this way, and it is the cheapest credit a shop can get.

Say your shop collects around Rs 78,000 from customers in a normal month, and pays Rs 26,000 in rent, power and salary.

The same Rs 80,000 account, one slow month

Goods taken on the new accountRs 80,000

Collected from customers in a slow monthRs 52,000

Rent, power and the helper's salaryRs 26,000

Left in hand on the day the cheque is datedRs 26,000

What the cheque asks for, on that one dayRs 80,000

Short by, with no conversation left to haveRs 54,000

Follow that box through. Same shop, same goods, same slow month. Under the cheque he is short Rs 54,000 on one fixed day, with no conversation available to him. Under the built-up account he is short Rs 4,000, which is one telephone call and two days.

Seven in the evening, shutter half down. Naseem has the same offer in front of him and asks the question Tariq never asked: "Give me Rs 30,000 of it and take Rs 10,000 today. If I pay you twice on the day, we make it the full order." The agency man agrees in four seconds, because he sells more that way than by walking out.

Know when what he asks for is too much. A cheque for more than the goods is too much. A deposit that is most of the account is not a deposit, it is a payment. A guarantee and a cheque together, on a first order, is a man who does not really want a customer.

Saying no is easier than it feels, because you are not refusing him, you are offering something else. "I do not give cheques. Give me half the order, I will pay a third at the door, and after two clean months we make it the full account." A supplier who wants to sell takes that. One who will not is telling you something useful before you owe him a rupee, and a second agency in the same trade is worth having anyway.

Whatever you give, write down what you gave

What shopkeepers lose is not the money. It is the paper.

A cheque you gave against an account you settled four months ago is a live promise sitting in somebody's drawer. That man is not a thief. He simply has a lot of paper and no reason to think about yours. Nobody remembers a cheque that was never used, and that is precisely the one that turns up.

So write four things down on the day you hand anything over: what you gave, the date on it, which account it stands against, and the day it must come back. Then collect it on that day, into your hand, and mark it returned. A cheque returned and torn is finished. A cheque you were told was destroyed is not.

The same goes for a deposit, which is your money sitting on his ledger. If the only person counting it is him, it will be counted the way he remembers it.

This is ordinary ledger work. In Wasoolo a supplier carries his own balance with what you owe and the date it is due, so before you promise anything against an account you can see what is genuinely outstanding rather than what you think is. Note the paper you handed over on the same entry and it stops being a thing you have to remember. On paper, one page at the back of the bahi with four columns does the same job, and the daily count keeps it honest.

The three are not equal and none is permanent. The cheque is the one to think hardest about, the guarantee is the one whose price you cannot count, the deposit is the one that ends. But the best answer to all three is the order nobody told you that you could ask for: smaller, shorter, partly paid on the day.

Common questions

Is it safe to give a post-dated cheque to a supplier?

It is safe in the months your money arrives as planned, and the hardest of the three in the months it does not. Give one only for the exact amount of the delivery, dated a few days after your own collection comes in, and only when you know that date well. If your recovery moves around, ask for a smaller order instead.

What if the supplier will not give goods without a cheque?

Offer him a smaller first order, a shorter period, or a part payment at the door before you agree. All three answer the same worry of his. If he refuses every one and still wants a cheque for the full amount, he is not really looking for a customer, and there is usually a second agency who is.

How much of a deposit is reasonable?

A part of the account, never most of it. A quarter to a third of the credit he gives you is the common shape, and it should come off the last bill or come back when you stop dealing. If he wants a deposit close to the size of the account, he is not giving you credit at all, he is asking you to pay first and wait for the goods.

Somebody has asked me to stand guarantee for him. What should I ask?

Ask the size of the account, the days he gets to pay, and what he already owes elsewhere. Then ask the plain question: would you give that man that much udhaar out of your own shop? If not, your name should not be on it either. If yes, tell him you want to hear the day anything goes late, not a month afterwards.

The account is finished. How do I get my cheque back?

Go and collect it the day you make the last payment, not later, and take it into your hand rather than agreeing that it will be torn up for you. Expect no argument, because a settled account has no use for it. Mark it returned in your own book the same day. In Wasoolo you can close the entry against that supplier with its date, so a paper you handed over never sits forgotten.

Does a guarantee cost less than a deposit?

In cash, yes, and that is why it gets chosen. In everything else it is often the dearest of the three, because what is on the table is another man's judgement of you, and you cannot buy that back. A deposit costs Rs 25,000 once. A guarantee that goes wrong costs a supplier, a friend in the market, and a story other shopkeepers repeat.