Contracts and Personal Guarantees: A Case Study

Posted by Marilyn Miller on January 12, 2018  /   Posted in Uncategorized

Contracts and personal guarantees make business debt collection infinitely easier. If you have no contract, you open yourself to an “them vs. us” dispute. Remember that anything in writing is better than nothing in writing, so if the best you can do is a quick email confirming payment terms and consequences for non-payment. The personal guarantee, which transfers the liability for business debts to an individual will be a great help if the business dissolves.

I recently received a file for collection which was in many ways a textbook case in the difference a contract and personal guarantee can make. Our client delivered a product that was billed to a business. The president of the company completed the credit application which included a personal guarantee.

The contract, also signed by the president allowed for a 7-day return. It clearly outlined when payment was due, and indicated the interest rate that would apply for past due invoices.

The buyers not only failed to pay for the product but returned it after 4 months. The company does not have assets in its name. Fortunately the president does, and because he signed the guarantee, we are able to pursue him personally.

What could have been a $3,000 loss became a recovery, because someone took the time to document.

A business owner once told me that he felt that getting a contract at the start of a new business relationship would set a negative tone. How could communicating all terms and conditions so that everyone understands them be a negative thing? Yet, I still receive calls weekly of people who fail to get a signed contract because “it is a rush job” or “we shook hands on the deal”

The days of the handshake deal are gone. You have the right to be paid, but you musy protect that right. Protect your business with a contract and a personal guarantee.

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