A personal guarantee arises often when your business looks to borrow money. Many times, if you are looking to get a loan (like a PPP loan), the bank that you are dealing with will also want you to sign a personal guarantee. But that's not the only place they are used. It can also be common in certain types of contracts between businesses that one business will seek a personal guarantee as part of a contract. For many clients, this can be confusing (since one purpose of your business is to insulate you from having to be liable for business debts), especially when they are given a contract with a long and convoluted guarantee attached as Exhibit A. Before you sign off on that guarantee, if you have questions, it's a good time to speak to an attorney to make sure it's something you really want to sign.
What is a Personal Guarantee?
A personal guarantee is a promise by you that if your business fails to pay a debt, you will step in and make the payment. By signing it, you are putting your own personal assets on the line for the obligations of the business. Essentially, you are "co-signing" onto the transaction. Even if your company goes out of business, you'll still be responsible to pay off the loan or other financial obligations.
When working with a bank, you often are agreeing to guarantee a certain amount of the loan (not always the full amount). Before signing on the dotted line, make sure you are comfortable with the amount you are being asked to guarantee.
Who Signs the Guarantee?
If you have business partners, you don't have to be the only person taking on the risk. Generally, if anyone else owns at least 20% of the company, they should be involved with the guarantee as well. The lenders prefer to spread the risk across multiple individuals if they can.
But if you aren't the owner, but are just being asked to sign the guarantee for the business, you should think long and hard before you sign off on the paperwork. Especially if you aren't actively involved in any way, a personal guarantee can create a long-term headache for your personal finances if the business you don't control can't make its payments.
What to Watch Out For
The devil is truly in the details of these documents. If you haven't read through the entire document, do not sign it. There are often terms, especially near the end, that are very important for you to understand. For example, if you are dealing with an out-of-state financial institution, you may be agreeing that any disputes are going to be heard in courts that are far away from you (but convenient for the lender).
Even more dangerous, some of these documents may have you agree to "waive" the service of documents. This means that the lender can bring a lawsuit against you and will not need to personally serve you (despite what the law requires). Often times they will simply drop documents in the mail and those documents may not reach you in time before they have taken a default judgment against you. Before you know it, you are receiving levies and other documents from your bank that the lender has put a freeze on your personal assets.
As with many other contracts you run across, it's important that you fully read and understand what's in them. You may be comfortable with the risks involved and with the jurisdiction being in a courthouse far from your business, but you need to know these things before you sign the document.
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Have you been presented with a personal guarantee for your business (or someone else's business) and aren't sure if you should sign it? Let's set up a Legal Strategy Session to review it and make sure you understand what you are being asked to sign.