What is a Personal Guarantee & When Should You Obtain One?
A prevalent supporting document for UCCs and mechanic’s liens is a personal guarantee; this document frequently makes its ‘grand debut’ once an account is past due and collection proceedings are under way.
A personal guarantee is an agreement that makes one liable for one’s own or a third party’s debts or obligations.
A personal guarantee signifies that the lender (obligee) can lay claim to the guarantor’s assets in case of the borrower (obligor) default. It is equivalent of a signed, blank check without a date. The obligee is generally not required to seek payment from the obligor’s assets before going after guarantor’s assets. The lender’s actions are usually based on whose assets are easier to take control of and sell. Once signed, a personal guarantee can only be cancelled by the obligee.
Donald Walsh, author of Five Questions and Answers on Personal Guarantees, recommends creditors obtain a personal guarantee any time there is concern about their customer’s viability, and encourages creditors to get the guarantee at the onset of the relationship (much like NCS encourages obtaining project information at the time of contract!).
Unsure which customers you should obtain guarantees from? Walsh provides a basic list of those companies that you may want to consider.
“Obviously, there is no bright-line test for asking for a guarantee. However, some typical patterns exist. These are all candidates for obtaining personal guaranties:
Those with few hard assets (equipment and buildings)
Corporations which have no clear history of debt payments
Corporations with a history of delinquent payments or judgments
Corporations which deal in a high volume of cash”
Once you’ve decided which customer(s) should provide you with a personal guarantee, the question becomes how to get the guarantee. Walsh indicates that the guarantee language can be added directly to your credit application, however, he notes, “the language of that guarantee needs to be carefully crafted to ensure that it imposes personal liability and that it is signed appropriately.”
Last on his list, Walsh addresses “Should You Set a Limit on Your Personal Guarantees?”
“I often encounter clients who have personal guarantees that limit the total debt covered by the guarantee. However, the delinquent account often exceeds this amount. I recommend not including any limitations on the amount of the debt. Under certain circumstances, personal and individual liability for a debt may also be created when a debtor does not sign in his corporate capacity as an officer of the corporation.”
In a recent court opinion, the court decided the general contractor’s lien was filed prematurely, therefore it was invalidated. Learn more about this case and the mechanic’s lien deadlines when you read Can a Lien Be Invalidated for Being Filed Too Soon?
Upcoming Educational Opportunities
5/2/17 @ 1:00 pm: UCCs Offer Security for Many Business Transactions
5/16/17 @ 1:00 pm: The Importance of Gathering Job Information
6/6/17 @ 1:00 pm: UCC Leasing and Conditional Sales
6/20/17 @ 1:00 pm: Building Payment Security with Preliminary Notices
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6/11/17: NACM’s 121st Annual Credit Congress & Exposition in Grapevine, TX
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