Personal Guarantees and Your Business

By Michael Safren, Esq.

As a small business owner, you know that it takes a lot to start and grow your business.  At some point in running your business, you may need to take on an obligation on behalf of the business, whether it be obtaining business financing, signing a lease agreement for the business, securing a line of credit from a vendor, or getting a credit card for the business.  The obligations may require that you sign a “personal guarantee.” 

A personal guarantee is an individual’s promise to repay credit on behalf of a business.  If your business is unable to pay its debt, you will become personally liable for that debt.  In effect, owners and executives “backstop” the obligation. 

Requiring a personal guarantee is fairly common for business loans, long term obligations such as commercial leases or equipment leases, or revolving credit transactions.  For example, the Small Business Administration requires a personal guarantees for anyone with 20% or more interest in the business for all loans backed by the SBA.

Generally, a personal guarantee is “unsecured,” that means it is not tied to one particular asset, unlike your home mortgage which is “secured” by the interest in your house.  This means that if you default on the loan, the lender can seek recovery against any and all of your assets including your house, your bank accounts, your investments, and personal property.  

Clearly, personal guarantees come with risks to you as a business owner.  First and foremost, the personal guarantee puts your personal assets at risk to satisfy any obligation that your business cannot.  However, there are other risks that signing a personal guarantee can expose you to including:

• Some personal guarantees can survive even after you sell your stake in the business, so you can still be financial responsible even after you exit the business;
• A personal guarantee may be embedded within the terms of an application for credit; such as a credit card, or a line of credit from a vendor, so you may be unaware that you have signed a personal guarantee;
• Lenders may count your personal guarantee(s), even if not invoked, as part of your financial obligations and debts which can limit your ability to obtain financing for loans for home, cars, and other high-dollar items;
• If the personal guarantee is invoked, your personal credit can be affected.

There are ways that you can avoid or mitigate these risks. First and foremost, you can negotiate with potential lenders, creditors, or landlords to avoid the personal guarantee.  Often there are financing options that do not require a personal guarantee.  Second, if you cannot avoid a personal guarantee, you can negotiate the terms of the of the personal guarantee to limit the time frame, or exclude certain assets from the guarantee.  Finally, you should read and review all loan documents and applications for credit carefully to ensure that you are not unwittingly signing a personal guarantee.

Speak to an experienced business attorney before signing any loan application, application for credit, or long-term business obligation.  An attorney can help you negotiate the terms of your loan and can help draft legal paperwork to avoid or limit your personal liability to the extent possible.

Michael Safren is a Partner at The Law Offices of Jenny Ling, PLLC.  His practice focuses on business, real estate, civil litigation, and probate.