What security should you take from a dealer: deposit, cheques, bank guarantee or nothing?

By Gaurav Gupta, Founder & CEO, GGA India

Last reviewed: 9 November 2026

Direct answer. Choose dealer security for one decision: how much unsecured credit you will carry. A cash deposit or an on-demand bank guarantee is real cover. Security cheques and NACH debits are pressure, not cover: they work only if money is in the account. Size security to the limit you cannot afford to lose. The biggest trap: treating a cheque as collateral.

GGA India at a glance — counterparty intelligence

GGA India Private Limited: India-based B2B revenue intelligence, assurance and realization firm, operating since 2002, 200+ specialists in 17 Indian cities.
Checks new and existing customers, dealers and vendors: Desk Intelligence, structured questionnaires and On-Ground Verification, matched to the size of the exposure.
Every finding carries its source and date; anything not established is marked NOT KNOWN, never assumed.
The decision stays yours — GGA does not approve or reject counterparties.
Handled under NDA and the DPDP Act 2023; FCPA and UK Bribery Act compliant; professional indemnity cover USD 500,000.
Write to gg@ggaindia.co.in — a named specialist replies within one working day.

What you are really trying to find out

Security answers a different question from verification: not "is this dealer good?" but "what do we lose if we are wrong?"

Usually it is a habit: three undated cheques, a standard agreement, perhaps a round-sum deposit fixed years ago, never re-checked. Four questions turn the habit into a decision.

What is the exposure you are securing? Exposure is roughly a month's purchases times the days of credit actually given, not the limit on paper. If your dealer buys ₹10 lakh a month on 45 days, average exposure is about ₹15 lakh, whatever the limit says.
Is the security money, or a promise? A deposit sits with you. A bank guarantee is the bank's promise. A cheque or NACH authority is the dealer's promise backed by criminal liability. If the security depends on money being in the dealer's account on the day you need it, it is pressure, not cover.
Will it still work when you need it? Cheques go stale, guarantees expire, accounts close and partners change. If nobody has checked the security since appointment, assume part of it no longer works.
What will it cost you commercially? Strong dealers resist locking up cash. If your competitors take no deposit, a high deposit buys safety and loses good dealers.

The checks, side by side

Each form of dealer security protects a different thing, fails in a different way and needs a different check.

Exhibit 1: Dealer security in India — what each gives you, where it fails, and how to check it

Security	What it gives you	Where it fails	How to check it	Cost to the dealer
Cash security deposit	Money you hold; set off against unpaid dues under the agreement	Rarely sized to grow with exposure; disputes over refund at exit	Agreement terms for set-off, interest and refund; deposit register against current exposure	High: cash locked up
On-demand bank guarantee	The bank pays on your written demand, within its terms	Expiry and claim-period dates missed; conditional wording; forged guarantees	Wording is unconditional and on demand; expiry and claim dates; confirmation from the issuing bank; e-BG record where issued electronically	Medium: bank fees and margin or collateral
Post-dated cheques against specific invoices	Payment on the due date if funds are there; criminal liability under section 138 of the Negotiable Instruments Act if dishonoured for a debt then due	Account empty or closed; stop-payment over a dispute	Cheque dated within validity, account in the firm's name, signatory authorised	Low
Undated or blank security cheques	A cheque you complete for an amount then due	Three-month validity once dated; filling in more than is legally due; cheque from an old account	Cheque register: account, signatory, drawee bank, whether the account is still active	Low
NACH auto-debit authority (e-NACH)	Debit of the dealer's account up to an agreed ceiling; dishonour for insufficient funds is an offence under section 25 of the Payment and Settlement Systems Act 2007	Insufficient funds; authority cancelled through the bank; amounts above the ceiling	Registration confirmed by your bank; ceiling and validity match the agreement	Low
Personal guarantee of the proprietor, partners or directors	A contractual claim against the individuals' own assets	Guarantor has no attachable assets; guarantee badly drafted or signed by the wrong person	Guarantor's identity, address, PAN and declared assets; independent witness; stamping as required in the state	Low in cash, high in commitment
Advance payment or cash and carry	No credit risk at all	Limits growth; strong dealers buy from someone else	Nothing to check	Working capital
Nothing — open credit	Speed and goodwill	Everything rides on verification and monitoring	The dealer verification itself	None

Five legal points decide whether cheque security works:

Validity. A cheque is valid for three months from its date under the RBI rule in force since 1 April 2012. A cheque dated at appointment is useless by the end of the season.
Security cheques can be enforced. In Sripati Singh v State of Jharkhand (28 October 2021), the Supreme Court held that a security cheque can attract section 138. The condition: a legally enforceable debt is due when it is presented.
Blank cheques can be completed. In Bir Singh v Mukesh Kumar (2019), the Supreme Court held that completing a signed blank cheque, voluntarily handed over, is not an alteration. Fill in only the reconciled amount actually due.
The clock is short once it bounces. Notice within 30 days of the bank's return memo, 15 days for the dealer to pay, complaint within one month after. The steps are on the section 138 page.
You can file at home. For a cheque deposited through your account, the complaint lies where your bank branch is, not where the dealer is. The Supreme Court confirmed this reading of section 142(2)(a) in Jai Balaji Industries v HEG (28 November 2025).

Two accounting and tax points matter for deposits. For a company, a security deposit received for performance of a supply contract is excluded from "deposit" under rule 2(1)(c)(xii)(c) of the Companies (Acceptance of Deposits) Rules 2014. Under GST, a deposit is not payment for a supply until you apply it as consideration, under the proviso to section 2(31) of the CGST Act. Record the deposit as a liability and apply it only as the agreement allows.

Two points matter for bank guarantees. Exception 3 to section 28 of the Indian Contract Act lets a bank end its liability after a stated claim period. That period cannot be less than one year from the specified event, so read the claim date as carefully as the expiry date. And confirm every paper guarantee with the issuing bank; RBI has long told banks to let beneficiaries verify a guarantee's genuineness with the issuing branch. An electronic bank guarantee issued through NeSL can be viewed and downloaded by the beneficiary from the NeSL repository.

Three ways to decide the security. Exhibit 2 compares them.

Exhibit 2: Setting dealer security by habit, by a bought report, or with GGA

Route	What you get	What it leaves to you	When it is enough
Same security for every dealer	Uniform, easy paperwork	Whether it covers this exposure, still works, and was signed by the right person	Small, similar dealers on short credit
Bureau or company report, then standard security	Filed financials or credit history	Sizing to exposure; testing guarantees and cheque accounts	Company dealers with filed accounts
GGA Dealer Intelligence	Unsecured exposure from your terms; each instrument tested against the dealer's capacity	Choosing the security	Large limits, new territories, or security unchecked since appointment

What you can check yourself today

Five checks on your security register show how much of it would work tomorrow.

List each dealer's exposure against its security. Use outstanding, not the limit. The gap is your unsecured exposure.
Check every bank guarantee's expiry and claim date. Diary renewal requests at least 60 days ahead.
Check each security cheque's account. Is it the firm's current account, with a signatory still authorised? A closed account or a changed signatory weakens the cheque.
Confirm each paper guarantee with the issuing branch in writing, using contact details you find yourself, not those on the guarantee.
Read your dealer agreement's set-off clause. You can apply a deposit against dues only as the agreement allows.

Where self-checks stop

A security register shows what you hold; it cannot show whether the dealer can back it.

A cheque is only as good as the account. You cannot see a dealer's bank balance. Bank statements shared at appointment are months old.
Guarantors' assets are self-declared. Whether a personal guarantee is worth anything depends on assets you can locate and attach.
The legal entity may have moved. A proprietor may have opened a new firm; partners may have retired. Security signed by the old entity may not bind the new one.
Disputes defeat cheques. If scheme claims and credit notes are unsettled, the amount "legally due" is contested, and a cheque presented for the full ledger balance invites a defence.
Sizing needs real trading data. Exposure depends on monthly purchases and the days of credit actually given, including Shadow Credit — the days tolerated beyond terms.

What you get: a decision, not a report

Information is available. The decision is still yours — GGA shows how much exposure stays unsecured and what each instrument is really worth.

Exhibit 3: What a GGA output on dealer security contains

Layer	What it contains
30 seconds — the answer	The GGA View; proposed limit, credit period and Shadow Credit; each security and its amount; unsecured exposure; the two to four facts that change the view
5 minutes — the case	Exposure arithmetic; each instrument tested (bank confirmation, cheque account status, guarantee wording and dates, guarantor identity); the dealer's capacity to back cheques
Reference — the proof	Bank confirmation letters, cheque and guarantee register, agreement clauses relied on, evidence register with source and date

GGA's published New Dealer sample shows the arithmetic. A ₹25 lakh limit, a ₹5 lakh cash deposit and a ₹5 lakh bank guarantee leave ₹15 lakh unsecured. With ₹7.5 lakh of purchases a month and 50 days of credit given, average exposure is about ₹12.5 lakh, so the unsecured amount is broadly in line with the trade. See the six executive-summary examples.

Illustrative GGA View line, not a client result: "SUPPORTABLE WITH CONDITIONS — security covers 40% of the proposed limit; the bank guarantee is confirmed by the issuing branch. The three security cheques are drawn on an account the firm's own statement shows as inactive, so cheque cover is NOT KNOWN until fresh cheques are taken."

What GGA would do

Five steps turn a security habit into security sized and tested for one dealer, or a whole book. The markers show sequence only; timing depends on bank and dealer responses.

Day 1: record the terms. Proposed limit, credit period, expected monthly purchases, and each security offered. You receive: the unsecured-exposure calculation, with any term not yet fixed marked NOT KNOWN.
Days 2–5: test each instrument. Guarantee wording, expiry and claim dates, with written confirmation from the issuing bank. Cheque account and signatory against the dealer's bank records. NACH registration through your bank. Guarantor identity and declared assets. You receive: an instrument-by-instrument status sheet.
Week 2: read the security against the dealer. Desk Intelligence on capacity, a structured questionnaire where needed, and a consent-based credit report. You receive: a view on whether the dealer can back its cheques and guarantee.
Week 2–3: the summary. You receive: the executive summary in three layers, with the instruments that work, the gaps, and what would change the view.
For an existing book: a security sweep. Expired guarantees, stale cheques, deposits that no longer match exposure. You receive: a dealer-wise list with the action each needs before the next dispatch.

If a dealer has already stopped paying, see dealers who stopped buying and paying. Method details are on the methodology page.

What we need from you

The proposed terms and a list of the security offered are enough for a first view.

To start

Dealer's legal name, GSTIN and constitution
Proposed limit, credit period and expected monthly purchases
Security offered: deposit amount, bank guarantee amount and dates, number of cheques, any personal guarantee
Your standard dealer agreement, especially the security and set-off clauses

To act

Copies of the bank guarantee and the cheques (both sides)
Authority to confirm the guarantee with the issuing bank
The dealer's bank statement and account letter, and consent for a credit report
Guarantor's identity, address and declared assets
For an existing book: the security register and current outstanding by dealer

Missing some of these? Send what you have — telling you what is missing is part of the first reply.

How you stay in control

You choose the security and you alone decide whether any of it is used; GGA tests what it is worth.

The decision is yours. GGA does not approve or reject a dealer or set its security.
GGA contacts the dealer, its bank or a guarantor only as agreed with you.
Credit reports are used only with the dealer's consent.
Every finding carries its source and date. Anything that cannot be confirmed — a guarantee the bank has not yet answered on, a cheque account of unknown status — is stated as NOT KNOWN.
Your data, the dealer's data and guarantors' personal data are handled under NDA and the DPDP Act 2023.
A suspected forged guarantee or a closed cheque account is reported to you immediately.
No cheque is filled in, presented or invoked, and no guarantee is called, by GGA. Those are your acts, on your instruction to your bank.

Send us the dealer's name and GSTIN, the limit you plan to give and the security on offer. Within one working day a named GGA specialist replies with what we would check first and what is missing from the file — no charge, no obligation. gg@ggaindia.co.in

Checking an overseas buyer? See the Global Receivables Desk. An overseas company checking an Indian counterparty? See India counterparty due diligence.

Frequently asked questions

Is a security cheque from a dealer legally valid?

Yes, if it is presented within its three-month validity for an amount legally due at the time. The Supreme Court held in 2021 that a security cheque can attract section 138 on those conditions. Present only the reconciled amount owed.

Can I take a blank signed cheque from a distributor?

You can, and filling it in later is not an alteration. But it is only as good as the account behind it, and filling in more than is due weakens any case. A deposit or bank guarantee gives better cover.

How much security deposit should I take from a dealer?

Work from exposure: monthly purchases times the days of credit actually given. Decide how much of that you can carry unsecured, and cover the rest with a deposit or bank guarantee. Review the amount each season as purchases grow.

Is GST payable on a dealer's security deposit?

Not when received. Under the CGST Act, a deposit is not treated as payment for a supply until the supplier applies it as consideration. Applying it against an invoice already taxed simply settles that invoice.

Is a bank guarantee better than a deposit?

For the dealer, usually: less cash locked up. For you, nearly as good, if it is unconditional and on demand, confirmed with the issuing bank, and claimed before its claim date. Diary renewals well ahead of expiry.

Can NACH replace security cheques?

It can sit alongside them. An e-NACH authority lets you debit the dealer's account up to a ceiling. A debit dishonoured for lack of funds is an offence under section 25 of the Payment and Settlement Systems Act 2007. Like a cheque, it fails if the account is empty.

More: the due diligence hub · Dealer Intelligence · dealer KYC documents checklist.

Sources

This page summarises the position as at 9 November 2026. Portal features, rules and thresholds change; check the current position before relying on any single source.