How to get a signed guarantee from an owner or CEO
By Danny Batler
A financial risk every cannabis business faces when selling on credit is non-payment. When this happens, it hurts your cash flow and leads to financial issues.
One way to help control this financial risk is to have the company’s owner sign a personal guarantee making them personally liable for the debt.
Personal Guarantee
A personal guarantee is a promise made by an individual guarantor to repay a business debt if the business purchasing the good becomes delinquent or unable to pay.
The personal guarantee form must be accurately completed and signed to ensure the effectiveness of a personal guarantee.
The roles of the parties involved in the personal guarantee agreement should also be well-defined. How you define the roles you both play will determine if the deal becomes absolute or conditional.
An absolute personal guarantee agreement dictates that the guarantor assumes the obligation of repaying the debt.
A conditional agreement dictates that the guarantor’s liability 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 Guarantee
Most businesses incorporate, and as such are independent entities. This means the business owner cannot be held personally responsible for the business’s debts or legal problems.
It is almost always in the business owner’s best interest to separate themselves from their business for legal and financial protection. Unfortunately, this means that getting an Owner/CEO to sign a personal guarantee isn’t simple.
First, help the guarantor understand what is being signed and why. Be straightforward. Explain how the personal guarantee will affect the listed collateral. This is critical to ensuring the guarantor is aware of the consequences if their business fails to pay.
Let the 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.
You want to allow the guarantor to include other partners in the agreement so that they don’t have to do it all alone. Then, discuss with the guarantor the risk level you find acceptable. Finally, speak about the assets you feel will fulfill the personal guarantee.
Another way to persuade the Owner/CEO into signing the personal guarantee is by including some relief for the guarantor.
Create allowance for relieving the guarantor from the personal guarantee. One way to do this is to reduce the note after the guarantor has paid a percentage of the debt.
Make room for both your concerns and the guarantors. Ensure the guarantor feels that their concerns have been acknowledged in the agreement.
And the final way to help solidify a personal guarantee is to have it notarized so there is no confusion on the agreement’s legality.
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