Personal Guarantees – How, When and Why to Use Them?
Personal guarantees simplify the collection process and put you at the top of the list when a customer has to prioritize. It means, if a company fails to pay a business debt the owner agrees to pay personally. You still may not get paid every time, but you’ll get paid more often and collecting will be faster and easier.
A personal guarantee is one of those small steps that can provide big protection in the event your customer goes out of business or changes his company name. Both are tactics professional debtors use to avoid paying legitimate debts.
The easiest way and best time to get a personal guarantee is before you start doing business! Include it on your credit application. You do use a credit application when offering credit to a new client, right? A simple statement like the one at the bottom of this article can provide the difference between a successful or unsuccessful collection. If you have to take your customer to court, it could mean the difference between winning and losing. In any case, a debt that has been personally guaranteed is more likely to be paid than one that is not guaranteed.
The easiest way to ensure you do NOT obtain a personal guarantee is to wait for your customer to fall behind and then ask for it. Protect yourself and your money, use a credit application and use a personal guarantee.
Our colleagues at The Kaplan Group have a customer who prints the following on their application;
“You are asking us to stand behind your corporation, we are asking you to do the same. If you lack the confidence in your business’s ability to pay, that tells us we shouldn’t either.“
You might consider something similar. It may sound harsh and you may be afraid of losing new business, but as we’ve repeatedly pointed out, a customer who doesn’t pay isn’t a customer, he is a debtor and a drain on your bottom line.
Here is a sample personal guarantee, be sure to put it above the signature line on your credit application. Please remember I am not a lawyer, do not considered this legal advice. Always seek appropriate counsel for your situation.
NOTWITHSTANDING THIS ACCOUNT IS ESTABLISHED IN THE NAME OF A BUSINESS, I PERSONALLY GUARANTEE PAYMENT OF THE ACCOUNT. THE SIGNER MUST BE AN OFFICER OR OTHER AUTHORIZED TO SIGN ON BEHALF OT THE COMPANY.