Personal Guarantees Provide Payment Leverage

Nearly 69% of credit professionals who responded to a recent eNews poll request a personal guarantee on a case-by-case basis, while 17% never require them. A personal guarantee is a legal promise by an individual to repay credit issued to a business, should the business not repay the debt. Personal guarantees provide an extra level of protection to the creditor.

"A personal guarantee is an unsecured written promise from [a principal of the company]," said Juanita Reyes, credit manager for Eastern Quality Foods (Ponte Vedra Beach, FL). "If the company defaults, the creditor can pursue the individual's personal assets to recover the debt."

A personal guarantee may be warranted when a customer's credit file does not support the projected risk, Reyes said. If the owner has substantial assets to support the liability, a personal guarantee will be requested. "We also use cross-corporate guarantees when billing a subsidiary affiliate—the child account of a larger parent company—to ensure obligations will be met," she added. In these cases, the parent company agrees to cover the debt if the subsidiary defaults.

Reyes verifies the financial information of the guarantor. "We must verify personal assets; otherwise, the personal guarantee is not a useful tool."

Personal guarantees also can ensure proper business practices are being followed, said Marlene Groh, CCE, ICCE, regional credit manager for Carrier Enterprise LLC (Charlotte, NC). "I believe in personal guarantees when owners do not clearly separate their personal lives from their business lives by mixing and mingling funds. We request a personal guarantee on every account."

Groh acknowledged that many companies will ignore the personal guarantee stipulation and will proceed to sign the contract without addressing it. However, larger companies are more likely to push back, she finds. When asked, however, customers will often comply.

Personal guarantees protect your interests when customers are not paying in a timely manner, Groh said. If an individual refuses to sign a personal guarantee, she reminds the customer that a personal guarantee is just a piece of paper. "It means nothing unless you do not hold up your end of the bargain." From her experience, personal guarantees similar to lien rights in construction projects move her company to the top of the list for payment because the guarantor does not want to become liable.

"A personal guarantee is a tool I have used more times than I can count," Groh said. "It is the ace in my back pocket that I pull out to win a hand or a collection on an account. I value having it in my arsenal and don't like to be without it."

-Bryan Mason, editorial associate