It’s not possible for most capital-intensive businesses to simply “bootstrap” their way to success. It’s often necessary for them to borrow as a means of expanding—or just stay afloat. And when a business does borrow, it’s typically not just the business, itself, that’s on the hook to pay back the lender. In many instances, the business owner is asked to sign a personal guarantee.
This poses risks to the business owner, but they’re often unavoidable. However, as discussed below, there are ways to lessen the risks of signing on the dotted line of a personal guarantee.
What is a Personal Guarantee?
A personal guarantee is an unsecured contractual promise from a business owner guaranteeing payment on debt incurred by the business. The debt may be related to an equipment lease, a line of credit from a bank, or customer financing of a purchase of supplies from a vendor, to name a few common examples.
If a guarantee is signed, then if the business does not pay its debt, the lender may seek recourse from the guarantor (i.e., the business owner) by pursuing their personal assets. Accordingly, by requiring a personal guarantee, a lender can limit risks that their borrowers default.
Generally speaking, if a business is relatively new, or doesn’t have a track record of profitability or assets that can be used to secure a loan, there’s a greater likelihood that a lender will seek a personal guarantor.
Lessen the Risk of a Personal Guarantee
If a lender demands that you sign a personal guarantee of a debt incurred by your business, it’s highly likely that you will be presented with the lender’s form personal guarantee agreement. This document will be very lender-friendly.
And while you may have no choice but to enter into a guarantee agreement, that doesn’t mean you can’t negotiate the terms. Indeed, given the stakes involved (the risk of losing personal assets and the possibility of personal bankruptcy), you should consult with legal counsel before even considering signing a personal guarantee. An experienced lawyer can help you negotiate terms that will help lessen the risks associated with a personal guarantee. For example:
If your business borrows, it’s almost inevitable that you, as the business owner, will be confronted with the need to sign a personal guarantee. Understanding what you’re undertaking is crucial. It’s possible to negotiate better terms that limit or even eliminate your personal exposure.
Before you agree to anything, make sure to consult an experienced business attorney. Contact Zana Tomich to learn how to minimize your risk when entering into a personal guarantee.
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