A personal guaranty is a legal promise that, if a business is unable to repay debt, an individual will assume responsibility. Credit issuers use personal guaranties to ensure repayment of the loans they issue to businesses. Some creditors will not even consider giving out a business loan without a personal guaranty. For many small businesses, the creditor is the gatekeeper, and the personal guaranty is the key to the gate.
Before signing for a business loan, it is essential to know how creditors enforce personal guaranties.
Before you sign, know these 10 facts about personal guaranties:
- This Time, It’s Personal. A personal guaranty is a promise to be personally responsible for the obligation of another person or company. The person or company to whom the obligation is owed—usually a lender—can enforce the obligation against the guarantor just like the original obligor.
- Would You Loan Money to a Teenager? No, neither would a bank. Unfortunately, banks look at your new business and see a teenager. Lenders want an “adult” to co-sign for their loan—often the owners of the company.
- Keys to the Gate. If the limited liability aspect of your corporation, LLC, or LLP is a wall between your business activities and your personal wealth, a personal guaranty is the key to the gate. Personal guaranties make sure that you are “all in.” Good for the lender, bad for entrepreneurs looking for a fresh start.
- It’s Your Problem. Banks often require a number of people to personally guaranty the same obligation. These guaranties are usually “joint and several,” meaning that the bank can enforce payment of the whole amount against one of the guarantors. It’s up to that poor guarantor to go after reimbursement from the other guarantors.
- Ties that Bind. You can dissolve your marriage or your business partnership, but that has no impact on the personal guaranties made by the parties. As a result, you may still be responsible for your ex-spouse’s or your ex-partner’s debt. You can ask the lender to release the personal guaranty, but it’s not likely to happen.
- Changes. Often, a change in the circumstances of a guarantor triggers a default under the obligation. So if the uncle who guarantied your loan dies, becomes disabled, or files for bankruptcy, you could get a demand for full payment from the lender.
- Beyond the Grave. Personal guaranties survive the death of the guarantor. This means that, after the death of the guarantor, the guarantor’s estate might still be liable under the guaranty. Remember to give the lender notice in a probate administration.
- Bankruptcy Protection. Liability under personal guaranties can be discharged through the personal bankruptcy of the guarantor. That’s a good “out,” but the consequences of a personal bankruptcy are far-reaching.
- Pawn Kings. To avoid having to make a personal guaranty, you have to convince the lender that your business is good for the money. The most common way of doing this is through the pledge of other valuable collateral—just like a pawn shop. It helps to have a good credit history, too.
- No Guaranty. Personal guaranties are great for lenders, but they’re no slam dunk. A lender seeking to enforce a personal guaranty has to track down the guarantor, sue him or her personally, prove that the guarantor is liable for the debt, and then enforce the judgment against the guarantor’s unprotected assets, whatever they are. It’s a long, costly process, and the guarantor is likely to fight it every step of the way.
While personal guaranties offer protection for lenders, they are a financial risk for individuals with small businesses. With a personal guaranty, you pledge your assets, including your home, bank account, and wages, as collateral. Personal guaranties are not for everyone, but it may seem like the only way to get your business started. BrewerLong can help. We have years of experience representing small businesses and business owners in the state of Florida.
Set up a free consultation by calling us at 407-660-2964 or contact us online. We are happy to advise you on business contracts and liability to ensure protection of your assets.