A personal guaranty is a legally binding promise by one person to cover someone else’s financial obligations. Personal guaranties exist mostly to protect lenders and creditors. The bank that gives a loan to a small business might want the owner to back it with a personal guaranty, so if the business defaults on its loan then the bank can collect from the owner too. A supplier of construction materials might also want the owner of a contracting company to personally guaranty payment, so that the owner will come through with the money if the business cannot.
If you do give a guaranty you are personally on the hook if the lender or the supplier wants to collect. Because this can wreck your finances, you should carefully think through the risks before you give a personal guaranty. Banks give loans all the time, and most business owners meet their obligations. Occasionally, though, when the economy turns south or other difficulties get in the way, owners default on their loans. Sometimes the unexpected occurs and your business cannot repay its debts. If you have provided a guaranty, then you may be required to do so. Your personal assets, such as your house or bank accounts, may then become available to satisfy the debts you have guaranteed.
This means that in most cases, almost anything you own can be taken by the creditor who was owed the debt. This could include expensive things like your car or boat, as well as less expensive things like a savings or investment account, a college savings fund, even toys and stamp collections. You could also lose any real estate you have a title to, including your home and any vacation homes. This puts your entire family’s future at risk, which is why a personal guaranty is such a big deal.
Some Benefits
There are some benefits to a personal guaranty. As the business owner you may find that your business can get funding, credit, or suppliers who will not hesitate to offer the products and services your company needs. Lenders and creditors who get a personal guaranty generally will feel much more confident in a business and its owner. This can be especially important when your company is small or in its early stages, since it may not yet have established a credit history. This can help to jump-start your business by giving it the loans it needs to grow.
What might be less clear is how a personal guaranty can also help an established business that has been operating for a longer time. If you are having trouble getting a loan from a conservative lender, providing a personal guaranty can calm the lender down and get the loan approved. By providing a personal guaranty, you and your company may be able to access more money and secure better interest rates from your lender. If you think you could still safely manage your debts under these circumstances, then signing a personal guaranty might be in your business’s interest.
Limited or Unlimited
A personal guaranty can be limited or unlimited, meaning that if your business defaults then you are required to pay back either a specific dollar amount or whatever the entire balance may be. If the guaranty is unlimited, you may also have to pay interest and attorneys’ fees, plus collection costs.
Imagine that you have a business and have promised to pay your suppliers $50,000 for building materials. You also gave a personal guaranty, so the suppliers can pursue you and your assets if your business cannot pay the $50,000. Now imagine that your business is unable to pay, and that the suppliers sue you for the full amount. A supplier with an unlimited guaranty can pursue the entire amount of the debt, plus interest and additional charges. Over time, this can balloon into a much larger amount than the original $50,000 you had promised. The interest that you let accrue while you weren’t paying will pile onto the total, and the supplier may end up hiring an attorney to collect. Attorneys charge their own fees. If you refuse or can’t pay, the size of that original bill could double.
Not all guaranties are unlimited, though. A limited guaranty will set an upper boundary on how much the lender can collect from you. If you were to provide a personal guaranty for that same $50,000 bill in the above example, you might limit it to $25,000 or another set amount. Whatever the sum, you would then only be responsible for paying that specific amount. This can help you significantly limit your risk as the guarantor. If you have business partners, limited guaranties can make good sense.
An Experienced Business Law Attorney
Personal guaranties are full of terms that have legal meanings which may not be clear to someone who is not trained as an attorney. It is extremely important to understand exactly what you are agreeing to, since you will be putting your personal assets at risk. For the sake of your family’s future you should have an experienced business law attorney guide you through this process. A lawyer can help you to figure out exactly what the risks are, what your potential exposure will be, and how you can negotiate the best possible deal. An attorney can be especially helpful in spotting and suggesting other areas for negotiation that you may not have noticed. An attorney can help you build legal protections into the agreement that can prevent you from being overburdened if the debt ever ends up in your lap.
On the other side of the deal, a lender can protect itself by requiring a personal guaranty. If you are the lender in a potential guaranty situation, then you may want to require one. If you do not require a guaranty then you may be stuck with a hard-to-collect debt and an owner who is uninterested in paying. Getting a personal guaranty can encourage the owner to make sure that the loan gets repaid. If the worst occurs and the debtor ends up in default then you will be able to go after their personal assets.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
