If your business sells products or services to other businesses where you allow them to pay you on credit (net 30, 60, or 90 days), this article will help you manage the risk of a client not paying you.
A financial risk every cannabis business faces when selling on credit is that the client won’t pay an invoice when comes due. When this happens, it hurts your cash flow and leads to financial issues. If your business used financing to supply their P.O. You can end up footing the interest bill. This means you’re out both the money from the client order as well as the interest accrued to make the sale.
One way to help control this financial risk is to have the owner of the company sign a personal guaranty making them personally liable for the debt.
A personal guaranty is a promise made by an individual guarantor to repay a business debt in the event the business purchasing the good becomes delinquent or unable to pay. A personal guaranty form is a legal document in which the personal guaranty is signed. Through a personal guaranty, your business gets the assurance that it will be paid even in the event that your client business has financial instability and becomes unable to pay.
How to use a personal guaranty form
To ensure the effectiveness of a personal guaranty, it is vital that the personal guaranty form is accurately completed and signed. To ensure accuracy when completing a personal guaranty, there are a number of standard formats that provide guidelines for what information is required for the form to be legally valid.
The roles of the parties involved in the personal guaranty agreement should also be well-defined. How you define your role and that of the guarantor will determine if the agreement becomes absolute or conditional. An absolute personal guaranty agreement dictates that the guarantor assumes the obligation of repaying the debt. A conditional agreement dictates that the liability of the guarantor to repay the debt is dependent on a particular event, in addition to the business’ default.
How to get the owner/CEO to sign a personal guaranty
Most businesses incorporate and such are independent entities. This means the owner of the business cannot be held personally responsible for the business’s debts or legal problems. It is almost always in the best interest of a business owner to separate themselves from their business for legal and financial protection. As such, having an owner or CEO sign a personal guaranty is not easy.
First, help the guarantor understand what is being signed and why. Be straightforward. Explain how the personal guaranty will affect the listed collateral. This is critical to ensuring the guarantor is aware of the consequences if their business fails to pay. Explain that you are taking a large financial risk by selling to them on credit. Let guarantor know that by doing business with them even when the two firms have no financial history together, a default will create financial hardship for your business, and that is a risk you are not willing to take.
Second, allow the guarantor to include other partners in the agreement.
Third, discuss with the guarantor the risk level you find acceptable. Speak about the assets you feel will fulfill the personal guaranty.
Fourth, include some terms of relief for the guarantor. Create allowance for relieving the guarantor from the personal guaranty. One way to do this is to reduce the note after the guarantor has paid a percentage of the debt.
Fifth, allow negotiations on the agreement. Make room for both your concerns and the guarantors. Ensure the guarantor feels that their concerns have been acknowledged in the agreement.
Lastly, if possible, have the agreement notarized so there is no confusion on the legality of the agreement or that it was not signed under duress.
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