What is a guarantee? It is a promise — a promise that something will work the way it is supposed to work.
When someone makes you a promise, you tend to believe them. If someone guarantees their product or service to you, you are probably more likely to choose that product or service over another.
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.
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.
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 noncollectable 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.