Originally published April 19, 2017. Republished May 25, 2018.
As a small business owner, it’s likely there will come a time when you seek a loan.
As you go through the borrowing process, you might find yourself pausing on a section of the application that asks for a personal guarantee.
Your company needs financing, but research and due diligence puts your personal information at risk. The more options you consider, the more vulnerable you become. All lenders want to run your credit and access your personal information. Do not let them. Let Mayava find you the best rate available, safely and quickly without putting you and your company at risk.
You might hesitate and ask a few questions or, even worse, you might sign anyway without thinking twice about it. But the question remains:
According to the Small Business Administration, any business owner with a stake of 20 percent or more in a company must sign a personal guarantee in order to secure a loan. A personal guarantee promises the lender that the borrower will pay the loan back and on what terms, even if the business fails.
Before you sign anything, you should understand what a personal guarantee is and what it might mean for you, your family and your business.
Here are two of the most common personal guarantees:
When you sign an unlimited personal guarantee, you are making a legally binding commitment that you will allow your lender to collect 100 percent of the loan amount plus any legal fees that might be associated along with it.
This means that if your business fails, your lender could hire lawyers to get the full loan amount plus their legal fees by coming after any of your personal assets, including your retirement funds, your kids’ college funds, your life savings, your house, your car, or any other assets that they determine necessary to pay it all back.
Unlimited personal guarantees offer you, the borrower, almost no financial protection, should your business fail.
Limited personal guarantees set a dollar amount on how much can be collected from you if you ever default on your loan. These guarantees are often used when multiple owners of a business seek to take out a loan for their shared company because they define exactly how much each owner is responsible for, should the business fail.
But there are two types of limited personal guarantees.
A SEVERAL GUARANTEE means that the individuals involved in the loan have a predetermined amount of liability that they’ll face if the business defaults. The amount is typically proportional to the individual’s stake in the company.
A JOINT AND SEVERAL GUARANTEE means that each individual is potentially responsible for repaying the entire loan amount. The lender cannot ask for more than what it is owed, but in the event that the business fails and your partners don’t have enough personal assets to cover their portion of the debt, the lender can come to you for the full amount owed.
So, do not agree to any type of personal guarantee until you look very carefully at your business and your finances. Seek out a financial advisor and discuss your options before you make your final decision. You’ll be glad you did.