An issue I see more frequently is distrust of simply getting personal guarantees whether they are for lines of credit, forbearance on past debt, or for some other reason. Many business owners are becoming more savvy about getting personal guarantees, but personal guarantees are often not sufficient to provide security for creditors.

Besides a personal guarantee, there are plenty of things a business can do to ensure it gets paid. The first and most obvious is to obtain the debtor’s agreement that the debtor’s property (i.e. inventory, equipment, furniture, and the like) shall serve as collateral. Of course, in doing so, it is necessary to file the appropriate paperwork with the appropriate governmental offices.

Another option is to get a mortgage against the debtor’s real estate, if any. Just because the monies owed are not for the purchase of the land does not mean that the debtor cannot give you a mortgage against the land. This option is often overlooked but should not be.

Yet another option is a letter of credit. A letter of credit, in many ways, acts as a personal guarantee from a highly reliable source, typically a bank. Letters of credit have rather stringent requirements and should only be used by those with competent counsel or experience with them.

A final option is some type of security agreement from the debtor’s owner, often a mortgage on the owner’s house. This is a very aggressive option and is last on this list for that reason. Fundamentally, a personal guarantee often does not adequately secure a creditor, and it is advisable to at least consider taking some kind of additional steps to secure the debt.

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