A personal guarantee works like this. Your business, Supply Co enters into a contract with your customer, Customer Co. Now, if Customer Co defaults on payment, with a personal guarantee, you can require Customer Co's guarantors (usually the owners or directors) to pay up.
Moreover, when:
- (a) you are dealing with a company, and
- (b) you're worried it won't have the money to pay you,
consider asking the company's directors to sign a Personal Guarantee.
This is a fair request when you are dealing with a small "ma and pa" run business where the directors both run and own the business. On the other hand, when you are dealing with a larger business (like a public company) the directors may be professional manages who do not have an ownership interest in the business and therefore it's unlikely they will provide you with a personal guarantee.
If you buy a property in the name of your company, a bank generally won't lend you money unless you sign a personal guarantee. That's because the bank knows your company could default and want's the right to go after you personally. The banks know how to protect themselves.
You too can get the same legal protection with Legal Zebra's easy to use Personal Guarantee Template.
In simple terms, if you have don't have a personal guarantee in place and the business you are dealing with can't pay its debts, you will have to line up with the other creditors (and may only get cents in the dollar).
By contrast, when you have a personal guarantee in place, the owners/directors of the business will have to pay up! The very fact the guarantee is in place often means the business will ensure you get paid on time, since the guarantors of the business don't want to be liable for the debt.
