Why personal guarantees can make a difference in business collections

Why personal guarantees can make a difference in business collections

On Behalf of | Aug 13, 2022 | Collections

People who run a business or handle transactions understand the importance of binding contracts. The terms outline the scope of the goods and services provided, the timing, and the cost, but it also stipulates what happens if a customer fails to pay their invoice. One aspect of a credit application may include a personal guarantee, which performs a specific function.

What are they?

A personal guaranty makes the person who signs the agreement personally liable for an unpaid debt. A business may employ this if the person signing the contract is a shareholder or using an LLC, which generally protects the owner from liability for business debt. Using the personal guarantee thus gives the creditor a secondary source for payment. It will likely further motivate the owner/guarantor to make sure their business pays its bill.

These guarantees may be conditional or unconditional. The unconditional guarantee has no limits, and the guarantor is responsible for the entire amount. The conditional guaranty can stipulate:

  • The amount the guarantor must personally pay
  • How long the creditor has to recover payment from the guarantor
  • Both above conditions

Not only is it an effective tool for guaranteeing payment, but the personal guarantee also enables the creditor to go straight to the guarantor. This approach avoids a more complicated procedure that could take longer because there are more hoops to jump through when dealing with a business.

The contract must be binding

Contracts must meet all legal requirements here in California if the courts are to enforce them. Businesses with questions about how to employ or implement a personal guarantee can consult with a collections attorney to determine if it is a practical course of legal action.