As a small business owner, you may sometimes need an infusion of cash to keep growing your business. Maybe you need to acquire real estate, equipment, or inventory, or maybe you just need to cover payroll and overhead for a short period. In these cases, a lender may ask you to provide a personal guarantee to secure the loan. Before you sign anything, it’s important that you understand the risks and responsibilities that the guarantee entails.
Understanding Personal Guarantees
When a small business owner signs a personal guarantee, they make a legal promise to repay a debt owed by their business if the business defaults on its payment obligations. For limited liability businesses such as LLCs and corporations, the business has the sole responsibility of paying its debts. Creditors usually cannot pursue repayment from a corporation’s or LLC’s owners. Nevertheless, if a business owner makes a personal guarantee, they become responsible for payment if their business defaults.
Examples of transactions where a lender or creditor may ask for a personal guarantee from a small business’s owner include:
- Business loans
- Revolving lines of credit
- Business credit cards
- Equipment leases
- Commercial leases
- Commercial mortgages
- Supplier/vendor financing
Types of Personal Guarantees
Personal guarantees come in different forms, each of which entails different obligations for the guarantor. The most common types of personal guarantee agreements include:
- Unlimited personal guarantee : The business owner is responsible for repaying the entire debt if the business defaults.
- Limited personal guarantee : The business owner’s liability for defaulted debt is capped at a specific percentage or dollar amount.
- Joint and several guarantees : Multiple guarantors are required to repay the full amount of the debt. These agreements usually come into play in multi-owner small businesses.
Small business owners should understand the type of personal guarantee they’re signing, so they know of their potential risk if the business defaults.
Risks and Legal Implications
Signing a personal guarantee for your small business’s debts can have the following risks and legal consequences:
- Exposure of your personal assets to seizure by creditors to satisfy your business’s debts if you fail to repay the loans
- Possible liability for business debts even after your company enters Chapter 7 or 11 bankruptcy or dissolves
- Potentially adverse consequences for your personal credit score and report for any default
Personal guarantees for business debt may also include waivers of various legal protections that apply to personal or consumer loans. Review your agreement carefully to ensure you understand your legal obligations.
How To Protect Yourself Before Signing a Personal Guarantee
You can best protect yourself when signing a personal guarantee of your company’s debts by:
- Having an experienced attorney review the agreement before you sign, so they can explain your rights and obligations
- Negotiating favorable terms, such as capping the guarantee, placing a time limit on the guarantee, or limiting the circumstances under which the creditor can enforce the guarantee
- Keeping business and personal assets separate to avoid commingling
- Considering alternatives to personal guarantees, such as obtaining secured loans or agreeing to higher interest rates to avoid the need for a guarantee
Contact a Business Law Attorney Today
Are you considering taking on a personal guarantee in order to provide your business with the cash infusion it needs? If so, get the help of a trusted law firm before you sign on the dotted line. A skilled business law attorney can advise you about the potential traps and upsides of a personal guarantee and help you make an informed decision that meets your personal and business needs. Contact The Cooney Law Offices today for an initial consultation about how we can help you.
