As a business owner, you may sometimes be asked to sign a personal guaranty. This is a common request from lenders or landlords who want an extra layer of assurance that your business obligations will be met.
But first, what is a personal guaranty?
A personal guaranty is a pledge that you, as the business owner, will take personal responsibility for your company’s debt or other contractual obligations. If your business can’t fulfill its end of the deal, you agree to step in and cover the costs yourself.
Lenders often require personal guaranties, especially for new businesses with limited financial history. It gives them confidence that the debt will be repaid, even if the company can’t meet its revenue expectations.
Key things to consider before signing a personal guaranty.
- Define exactly what you’re guaranteeing. Is it a fixed amount, or an open line of credit? Does it cover just one specific contract, or future obligations as well?
- Determine the scope of your liability. Is it a limited guaranty, capping your risk at a certain amount? Or an unlimited guaranty, holding you responsible for the full debt plus any additional costs?
- Identify the duration of the guaranty. Many are open-ended, so be sure to negotiate an end date or release condition.
- Note whether it’s “joint and several” liability. If signing with co-owners, this means you could be on the hook for the entire debt if the others can’t pay.
- Understand the default terms. Some guaranties have “accelerated” default clauses that could trigger your liability even for a single missed payment.
Potential Impact on Your Finances
It’s critical to understand that a personal guaranty puts your personal assets at risk. If the business defaults, creditors can come after your savings, home, and other personal property to recoup the debt.
This can significantly impact your own financial well-being, so it’s important to only sign a guaranty you’re truly prepared to honor.
Negotiating Alternatives
In some cases, you may be able to negotiate alternatives to a personal guaranty, such as:
- Offering a higher interest rate instead of a guaranty
- Providing a larger security deposit
- Putting up specific assets as collateral
An experienced business attorney can help you explore these options and get the best possible terms.
Get Legal Advice
Ultimately, a personal guaranty is a major legal commitment. Before signing, it’s critical to have a business attorney review the contract, look for any red flags, and negotiate optimal terms on your behalf.
Protecting your personal finances is crucial, but you also want to maintain a good working relationship with your lender or landlord. With the right guidance, you can usually find a middle ground that works for everyone.
Need help reviewing or negotiating a personal guaranty? we’re here to help protect your business and personal interests! Just reach out at https://www.andersonlegalnc.com/.
Nothing on this website or this blog should be considered legal advice. Anderson Legal does not represent you and no client-attorney relationship is formed until you have completed our client intake process.
