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How to know when you need credit protection

Thea Dudley

Dear Thea,
What is the purpose of a personal guarantee? What protections does it offer and who should be signing a personal guarantee? Is it mainly sole proprietors? I am not convinced of the value of obtaining them.

— Should I get personal?

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Dear Personal,

Just as I have a deep love of a parade — any parade — I have a deep love for the personal guarantee for many reasons. Let’s count a few:

1)   It shows me the applicant is willing to put his mouth where our money is.

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2)     Gives my company another pocket(s) to go after if something goes horribly wrong and the company can’t or won’t pay.

3)      Allows me an opportunity to offer credit for a newly formed business that, being newly formed, has no credit history to evaluate.

4)    Affords me another way to increase a credit line to a company that may be at the top of its credit limit.

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5)   Could be the tipping point if I am on the fence about extending credit.

6)    Allows me to check the applicant’s personal credit. How do they pay their personal bills? Have they filed for bankruptcy at some point?

7)    The adoration from my attorney when I tell him to send a demand letter to the company and the guarantors for the outstanding debt.

8)    The opportunity to have a gentle discussion with the guarantors reminding them they are on the hook for the debt. If we have to sue, they are included.

What does it offer, you ask? Have I not given you enough to convince you the personal guarantee is worth your time and effort in offering you protection in addition to what you have on your credit application? Maybe protection isn’t the correct word. I prefer the descriptive word here to be “options.”

I like having options. The option to help my company make sure we get our money. The option to hold additional people accountable for the debt. No need to waste your time getting a personal guarantee from a sole prop. They are already on the hook just by definition of the entity type they have chosen. Partnerships — yes, you really want a personal guarantee from every partner in that ship. Based on experience, the majority of partnerships do not hold water long and turn into a bizarre version of the Titanic with everyone looking for a lifeboat and blaming others as the ship starts to list.

Corporations are typically tougher to get personal guarantees from, but not impossible. The common response is, “they incorporated for a reason.” Yes, Slick, I am aware of why you incorporated: to insulate yourself from the company debt in case some unforeseen event keeps you from fulfilling your commitment to me.

Consider adding the personal guarantee to your credit application. The guarantee should state that the guarantor is subject to the same rules and regulations as the business as stated in the credit application. If you approach it as a normal course of business, others will as well. It is optional. It doesn’t mean I won’t give someone credit, but without it for some, it may mean you are offered our COD club membership.

Will you get all your credit applications back with that beautiful, signed personal guarantee? Nope, but you will get a good number signed just by having it on the application.

Personal guarantees are like parades — even as one passes, another drum can be heard in the distance. Lead that parade.

With more than 30 years of credit management experience in the LBM industry, Thea Dudley consults with companies on a wide range of credit and financial management issues. Contact Thea at theadudley@charter.net

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