A quick google search is all anyone needs to see that personal guarantee is a very popular, and feared, topic. Most advice articles say that business persons should not sign personal guarantees. The purpose of this post is not to debate the merits of whether or not one should sign a personal guarantee, but to provide a brief snapshot of what a personal guarantee is, and how one is procured.
There is so much discussion on this topic because it is an easily and readily used device in business transactions. There is a reason “everybody’s doing it.” The personal guarantee, if properly executed, can be a strong and easy way to secure credit extended to a customer.
Personal Guarantee Language
A personal guarantee can be a stand-alone form as discussed below or it can merely be additional language added to the end of your sales contract. The key here is if you choose to put the language at the end of your contract, you must get the business representative to sign the contract for the business and then again have that person sign in a personal capacity.
While there are many ways to draft personal guarantee language, you need to make sure what your business uses includes some key components. The language of a personal guarantee must be clear. The guarantor must understand what he/she is singing up for. As in all contract law there must be a “meeting of the minds,” otherwise it may be void.
Further, its helpful to say that the obligation is continual, if that is the case, and if there are multiple people guaranteeing the debt, then each need to be liable both “jointly and severally” to the debt. The joint and several language will make sure that each personal guarantor is held liable for the entire debt.
More helpful information is to include the full name of the person making the guarantee in the language and in the signature block. I see so many signatures that do not have a printed name next to them. Other helpful information is the domicile address and/or the Social Security Number of the guarantor. These will help to identify the person if its ever questioned.
I recommend putting this as a separate paragraph after the contract signature. This way there is no confusion. This way is also less intimidating than the full page stand-alone personal guarantee.
Personal Guarantee Form
There are endless numbers of forms online for a personal guarantee. These can be very useful but many also have superfluous language that will not be good for your business model. This could lead to a possible nullity due to ambiguity. You want to read the language very carefully in a guarantee that you simply download from the internet.
Some businesses choose to have a stand-alone personal guarantee. This can be used for the first time that the client gets credit and be used for all its accounts and projects. It is also good from an intimidation standpoint. Some businesses do not want to scare customers and other do.
Is A Personal Guarantee Enough?
A personal guarantee is good. But in our ever evolving business climate, its simply not enough. Debtors find new ways to get around personal guarantees all the time. They also will go insolvent along with the company that they backed therefore making collection nearly impossible.
There is no one magic bullet to having strong credit policy. Since there is not one specific security device that will work every time, a strong credit policy has many different facets. Personal guarantees are good, but they are better when used in conjunction with a lien or bond. When your business has multiple security devices on the credit it extends, then it is in the best position to collect and get paid.