When your business is borrowing money, you may often be asked to sign a personal guarantee if you own more than 20% of the business. A few weeks ago, I wrote a quick blog about personal guarantees, who signs them, and what to watch out for. This week, the Wall Street Journal also looked at the issue of personal guarantees for small business owners and the burdens that many of those owners face after the havoc of the COVID pandemic. Part of my business law practice is working with my clients who own businesses who need to resolve these kinds of debts and obligations so that they can move forward with their lives.
Some Statistics to Help You Consider a Personal Guarantee
The authors (Ruth Simon and Heather Haddon) offer some powerful stats that you should consider if you are being asked to sign a personal guarantee for your business,
- Nearly 60% of small businesses with employees that took out loans used personal guarantees ~ you're not alone in this;
- 44% of the businesses with employees have more than $100,000 in debt and 8% owe more than $1 million;
- The US Census Bureau found that 18% of small businesses said they would need to obtain financial assistance or additional capital in the next 6 months.
The authors also spoke to a variety of business owners who are dealing with personal guarantees during the pandemic. Townswend Wentz, a restauranteur in Philadelphia, described his situation as "It's like trying to stand in quicksand."
When is a Personal Guarantee Needed
The newer your business, the more likely it is that you'll need a personal guarantee. Long-established businesses with earnings history don't necessarily need a personal guarantee because the lenders can see a history of their finances. But when you're just starting out, you don't have that luxury. If you are going to rent a commercial space, the landlord will often ask for a personal guarantee. As the Wall Street Journal notes, many of the restaurant owners featured in the story are in precisely this predicament. And if they are unable to reopen, then they need to find a way to negotiate the resolution of these personal guarantees. Your creditors may be willing to negotiate with you to release that personal guarantee if you are unable to reopen your business due to the pandemic.
What Do I Do If I Can't Pay It?
The first thing to do is not to panic. Although the thought of defaulting on the guarantee is very stressful, for many people, there are options. For example, if you're in New York City and run certain types of restaurants, the City Council has barred landlords from being able to enforce the guarantee through June 30. And the Wall Street Journal pointed out that many landlords will be willing to work out some kind of resolution of the guarantee. Remember, it's better for them to at least receive something of value than to be left with your personal guarantee and no way to collect against it because the pandemic has already ruined your finances.
So, if you find yourself in this situation, speak to the folks on your TEAM (Trusted Experts, Authorities and Mentors) and see if any of them can assist you with negotiating a release from your guarantee. If you don't have anyone to speak to, reach out to an attorney who works in this area to see if they can help you out.
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If you're considering a personal guarantee for your business, or you've got one that you need to negotiate a release from, let's set up a Legal Strategy Session and review the best options for you and your business.