This morning I came across a question on the Credit Management Association’s LinkedIn Group:
You have a Personal guarantee from the owner, but are you really safe and believe you are now guaranteed payment if the company fails? Numerous CM’s believe that simply having a PG will guarantee payment. The fact is, it may not. What are your experiences?
The comments are pretty good so far, with most credit managers saying the obvious: that it’s always nice to have a personal guarantee. I agree. If you can get a personal guarnatee on a debt, by all means do so, because it’s a great weapon when confronted with a non-paying account.
But, is it enough?
What Is A Personal Guarantee?
Defining a personal guarantee is a good place to start. The Business Dictionary provides:
Agreement that make 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 repayment first from the obligor’s assets before going after guarantor’s assets.
Long story short, you’re guaranteeing that your business will pay the debt. If the business can’t make a payment, the creditor will come after you and all of your personal assets (your home, boat, dog, food, underwear…) to get the debt paid.
If you’re looking for credit, you’ll always be advised by attorneys and advisors to avoid signing a personal guarantee. But, as mentioned here, if you’re a creditor you’ll want to do everything you can to get it.
Is It Enough To Get A Personal Guarantee? Are Lien Rights Better?
Let’s get right down to it. Is it better to have lien rights or a personal guarantee? If you want to avoid dealing with mechanics lien compliance, is it sufficient to just collect personal guarantees?
A few months ago we wrote “How Can I Secure Payment If There Are No Lien or Bond Rights On The Project?” This article mentioned the use of personal guarantees. It mentioned it, however, only as an alternative remedy if lien and bond rights were not available.
That’s because I firmly believe lien and bond rights offer much, much more security than a personal guaranty.
[pullquote style="right" quote="dark"]A personal guarantee is only as good as the person signing it. — Sandy McConnell[/pullquote] One comment on the LinkedIn question above-mentioned was spot-on: “A personal guarantee is only as good as the person signing it.”
The mechanics lien or bond rights provide the absolute best security for a company extending credit to a construction project. If the account is unpaid, you open all types of options to get you paid and the underlying claim is secured by the property itself. Refer to our recent article listing 17 Ways A Mechanics Lien Works To Get You Paid.
A personal guarantee is nice, but is it enough? It may not be, and it’s certainly not preferred over filing a mechanics lien.