While the economy continues to improve slowly, we are still seeing an increased level of defaults and litigation involving businesses which go bad, especially small undercapitalized operations.
Whether you are a lender, landlord or a seller of goods or services you need to protect yourself from the adverse economic impact of having your borrower/tenant/customer “go south”. Most business customers fully intend to pay when they come to you for credit, but as the old saying goes, “the road to hell is paved with good intentions.”
Perhaps the best way to insure that you get paid when dealing with a small business is to insist that the individual owner “personally guarantee” the performance and payment obligations of the business. A personal guaranty (suretyship) is a promise by the individual owner to be responsible for the performance of the business (typically operated as a corporation, limited liability company or limited partnership) and the payment of its monetary obligations.
A personal guaranty offers several benefits:
A personal guaranty offers several benefits:
- It serves as an up-front test of the credit of the business. If the owner refuses to offer a personal guarantee for the obligations of the business you should be suspicious and should proceed with caution.
- Having a personal guarantor provides an additional person who is responsible for the business obligations.
- Often a personal guarantor will have better creditworthiness than the business entity. Many recently formed small businesses are on a shoestring.
- Individuals tend to take their credit standing more seriously and therefore would be more responsive to collection efforts to avoid adversely impacting their credit score and history.
In summary, the personal guaranty has the desired effect of keeping the business customer honest. With a personal guaranty on the line, your business customer will be much less likely to simply walk away from your obligation when times get tough.
Contact us if we can be of help in improving your credit protections.
— Kevin Palmera