Many accounts receivable departments are looking for new tactics they can use to ensure a customer will pay them on time. These tactics vary from sending consistent payment reminders, making phone calls or check trade credit reports to avoid bad customers altogether. One often overlooked tactics, however, that many B2B businesses forget they can use is a personal guarantee.
WHAT IS A PERSONAL GUARANTEE?
A personal guarantee gives businesses a second line of defense when it comes to collecting on an overdue account. If a line of credit is taken out by a company and they sign a personal guarantee, the collections don’t have to end once the business refuses to make payment. For example, if the owner of the business signs a personal guarantee and the business itself fails to make payment, the accounts receivable department can then begin to call the owner of the business himself to make payment on the overdue invoice. In this case, the owner of the business is agreeing that if the business cannot pay, he will personally pay for the debt.
WHY WOULD YOU USE A PERSONAL GUARANTEE?
There a few scenarios when obtaining a personal guarantee, before the line of credit is issued, would be useful:
- If the potential customer’s trade credit report is not up to standards, obtaining a personal guarantee can help boost their line of credit
- When using a personal guarantee, those invoices will hold a higher priority increasing the speed at which you receive payments
- If the customer continues to refuse payment, the threat of litigation will hold more weight as the it could damage their personal credit or reputation
Using a personal guarantee doesn’t always mean that once it is taken to court, that it will be held up in court, although it does give you a good chance. Either way, it helps to give your business an extra line of defense against customers that are continually paying late. If a business owners personal credit or reputation is on the line, they will likely take action much more quickly.