Imagine this real life scenario. Your company enters into an arrangement to provide product or services to another business – on credit. The credit agreement is based on a stream of regular monthly payments. Everything is fine for a year, and then the payments begin become erratic. Shortly thereafter, they stop. Customer ignores requests for payment. One day, you receive a bankruptcy filing for the company. The company (your customer) had incurred massive debt, and has no assets. All is lost, right?
Well normally, yes. In the case of our recent case, there was chance for recovery even though the company went out of business without assets. Why? Because our client had the foresight to require a personal guarantee from the business owner.
What is a personal guarantee? Simply put, it is an individual’s pledge that they will personally pay any sums owed in the event their business fails or is unable to pay. A personal guarantee is not secured to any specific asset, (as a mortgage would be to a home) but can be attached to any or all of the guarantor’s assets
Would you buy new equipment for your home of office without some sort of guarantee that it would work in a certain way? Of course not. Similarly, you would be hard pressed to find a bank or leasing company that would lease you a piece of equipment or loan you money for your business without a personal guarantee.
Small business owners sign personal guarantees all the time, yet are reluctant to ask a new business customer for a personal guarantee. Ask! If someone is unwilling to sign a personal guarantee, ask yourself why. You may take a closer look at this customer’s creditworthiness.
We don’t want to tell you not do business with someone who won’t personally guarantee their business debt – that is your decision to make. But at least ask the question, and make an informed decision.
We will tell you that we see large receivables all the time that become uncollectible when the company dissolves and there is no personal guarantee.
Ask your attorney to draft a personal guarantee as an addendum to your customer contract. It is a wise investment that can save you time and money down the road.