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Personal Guarantee & Why They Are Important

Personal Guarantees

One of the most fundamental forms of collateral on business credit is the use of a personal guarantee.  Personal guarantees are important because they allow creditors to be able to circumvent the corporate veil created by corporations and limited liability companies.  When personal guarantees are signed, individuals who sign the personal guarantee have liability even if they are an owner of the Limited Liability Company or Corporation.  The four essential components of a personal guarantee are (1) that it should be a guarantee of payment as opposed to performance; (2) that the guarantee be irrevocable; (3) that it is a continuing guarantee as opposed to a guarantee for a specific sale or a specific period of time; (4) that the guarantee be absolute and unconditional.

 

A guarantee which is made up of these four elements is much more likely to be upheld than a guarantee that fails to identify one or more of these elements.

 

It is also important to remember that when a credit application or other contract including a guarantee is enforced, that in all likelihood the assets of the business are nonexistent or extremely limited.  Accordingly, the personal guarantee may be the most important aspect of the agreement. Thus, it is wise to make sure that your guarantee is as effective as possible.

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