In the credit granting world, we commonly see two methods creditors use to make the business principal (owner) liable for their company’s debts. The most common amongst the North American creditors is the personal guarantee, whereas the joint/ several indemnifications are lesser-known. This article will discuss both options and summarize PCM’s preference, from our perspective, as your credit recovery supplier.
Personal Guarantee (Guaranty)
A personal guarantee, at its most basic level, is a promise by the signor to be personally liable for the company’s debt in the event the company is unable to pay. A personal guarantee is a valid document and enforceable throughout North America, except if your customer is located in Alberta, Canada. In the province of Alberta, a personal guarantee, signed as part of the credit application process, is unenforceable, unless it was signed in front of a Notary Public. See Alberta’s “Guarantees Acknowledgement Act” for further details. While Alberta is a relatively small province in Canada, it will likely account for a significant amount of your credit sales so that an unenforceable guarantee will have a negative impact.
A guarantee can only be acted upon once it is clear that the corporate customer is unable to meet its obligations. Waiting to confirm a corporation’s financial status could harm your ability to recover funds from the guarantor in a timely fashion.
Indemnity clauses provide creditors with the option of collections against the business principal (owner) as well, but creditors have many more options using indemnity clauses when compared to a personal guarantee.
To add value to you, we have written an example of an indemnity clause that you can consider using in your business. Click here to download your free copy of our written indemnity clause.
As you can see, joint and several indemnity agreements create a co-customer when you initially set up your customer on credit forms, allowing you to report to the individual’s credit report.
Your commercial collection agency can act much quicker against the indemnitor, hopefully with positive results.
As a professional debt collection agency, we would prefer that our clients help us by using an indemnity clause rather than a personal guarantee, due to its many advantages, including uniformity across all borders.
If your credit application does not contain language similar to the example provided, we suggest speaking with your lawyer and get the changes made.