Hi, my name is Adam Stewart, Debt Collection Professional and owner of Debt Recoveries Australia and ADC Legal-Litigation Lawyers.
In Australia, the current level of personal bankruptcy and corporate insolvency is as high, if not higher, than at the height of the financial crisis. As a result, personal guarantees are a great way for you to protect position, in case your clients get into real strife and cannot afford to pay you.
Personal guarantees are the holy grail of debt recovery tools as it makes a certain party liable for the outstanding debt, even if the company or entity has become insolvent. Therefore, it is vital that you understand the impact personal guarantees can have if insolvency strikes, as well as how it can send a strong message to your clients that you are serious about payment.
So what is a guarantee? It is a promise by one party [natural or corporate, but usually natural] (known as the Guarantor) to meet the obligations (such as payment of monies) of another party [usually a company] (known as the Principal) where that entity fails to do so.
The easiest time to get a personal guarantee is when a business is first asking for credit. Many business owners will sign a personal guarantee just because it is on the form. Alternatively, a separate personal guarantee can be provided after the business’s credit has been evaluated.
Another good time to request a personal guarantee is when a business requests a higher credit limit. The hardest time to get a personal guarantee is once the business has fallen behind on its invoices. At that point, the business owner may be very reluctant to agree to become personally liable for the business obligations when their business is having cash flow problems.
While a personal guarantee does not ensure you will be paid, it can make it much more likely. Personally guaranteed invoices have a higher priority in the guarantor’s mind than those that are not guaranteed. The guarantor knows that if the business fails, they want to minimise their remaining personal debts. Thus, while a business is still alive and generating some cash, invoices that are personally guaranteed are more likely to be paid than those that are not.
Even if the business cannot pay immediately, having a guarantee makes it more likely the guarantor will talk with you, or your collection agency. Most debtors owe multiple vendors, not just one. They are more likely to give time and information to creditors who have a guarantee to avoid having you immediately escalate the matter. We, as collection agents, collect more money and faster when our clients have personal guarantees.
While a personal guarantee should simplify any recovery process, there are huge hurdles if they are not effectively drafted and executed. Just because it looks right does not mean it is. Have your guarantees reviewed by a specialist for flaws to ensure that your existing guarantees do not leak, strict and watertight. A specialist individually drafts any complex guarantees, too.
When the time comes to call on your personal guarantees, you need them to work. It is not the time to discover that you were complacent and overlooked something along the way because one mistake can turn you into one of the examples above.
The devil is in the detail. If a job is big enough to warrant a personal guarantee then take the time to get it right, or the simple reality is that it may be useless. So call me at Debt Recoveries Australia at 1300 799 511 or email me at email@example.com and I will provide you with some free Personal Guarantee Templates. Our legal arm, ADC Legal Litigation Lawyers (telephone number 1300 799 820), can also help in writing or reviewing your current personal guarantees.