Personal Guarantees - Why or Why Not?

A Personal Guarantee (PG) is a legal commitment often required from business owners or individuals when opening a commercial account or seeking credit for their business. The PG holds the individual personally responsible for any outstanding debt or liabilities of the business if the business itself fails to fulfill its obligations. Here are some pros and cons to consider when deciding whether to require customers to sign a Personal Guarantee:

Pros:

1. Increased likelihood of payment: Having a Personal Guarantee provides an extra layer of security for creditors or businesses offering credit, as it ensures that someone personally takes responsibility for the debt if the business defaults. This can lead to greater confidence in extending credit to the business.

2. Mitigation of risk: In the event of the business's financial distress or bankruptcy, the Personal Guarantee can be used to recover outstanding debts from the individual's personal assets, which may include personal property, real estate, or other financial holdings. This significantly reduces the risk for the creditor.

3. Encourages financial discipline: By signing a Personal Guarantee, the business owner may feel more accountable for the financial health of their company. It can incentivize responsible financial management and a greater commitment to the success of the business.

Cons:

1. Potential discomfort for customers: Requiring a Personal Guarantee can be off-putting to potential customers or business partners, especially for new or small businesses. Some individuals may be hesitant to put their personal assets at risk for their business's debts.

2. Limited effectiveness in certain scenarios: A Personal Guarantee may not be enforceable if the individual's personal assets are not substantial enough to cover the business's debts. In such cases, it may not provide the level of protection that the creditor seeks.

3. Legal complexities: Enforcing a Personal Guarantee can involve legal processes and costs, which may vary depending on the jurisdiction and the circumstances. This could result in time-consuming and costly legal proceedings, especially if the individual disputes the validity of the guarantee.

4. Relationship strain: Insisting on a Personal Guarantee can create tension between the creditor and the business owner. It may signal a lack of trust or could be interpreted as a negative reflection on the financial health of the business.

5. Limited scope: A Personal Guarantee only covers the specific debt or obligation outlined in the agreement. It may not cover future debts or liabilities that may arise in the course of the business relationship.

In conclusion, requiring customers to sign a Personal Guarantee for commercial accounts has its advantages and disadvantages. It can offer a greater sense of security to creditors, but it may also create challenges in terms of customer relationships and enforceability. Businesses should carefully assess their customers' creditworthiness and potential risks before deciding whether a Personal Guarantee is necessary. It is advisable to seek legal advice and ensure that the agreement complies with applicable laws and regulations.

Set up a consultation with me to go over weather you should implement PGs in your credit policy and how.

Natasha Salem

Commercial Business Development

Tucker, Albin & Associates Inc.

Office: 303-502-5663?ext 146