Collectively Speaking: Personal Guarantees
“Collectively Speaking” is a series of articles offering ARM industry tips to credit and collection professionals. Written by John Whyte, Vice President Business Development, Brown & Joseph, Ltd. November 13, 2013.
Some insight about Personal Guarantees.
Over the past several months we have fielded a lot of questions about personal guarantees: should we have one on new customers, are they enforceable, is it worth it? All very good questions.
A personal guarantee can be a stand-alone document or it can be incorporated into your credit application. The personal guarantee is the only way to get a person, usually a business owner or officer, in addition to the business, on the hook for paying invoices.
It is a promise by that individual (or celebrity news
individuals) that they are willingly staking their integrity and reputation behind a promise to pay that invoice in the event the business cannot. The PG must be signed as an individual, not as a business owner or corporate officer. If a business is going well and the forecast for profits is bright, signing a personal guarantee is not much of a concern because the business pays its bills, usually and preferably, on time.
If a debtor company is not paying your invoices, it is likely they are not paying others as well. They know who they have signed personally with and they know that that company, will look to the PG as a means of getting paid. Contrary to popular belief, the legal benefits of incorporation will not protect business owners from a PG. By signing a PG, guarantors give permission to pierce the corporate veil and gain access to savings accounts, cars, and property – including the family home as long as the PG is signed correctly and the signee has assets in his or her name.
Clearly, it is better to have a personal guarantee than to not have one. Again, a debtor is much more likely to pay the company who has them on the hook personally, before paying another business. Contact us today for more information.