Many entrepreneurs wish to maintain as much separation as possible between their business and their personal assets. Establishing a corporation can be a good way to keep your personal assets safe, but young companies may be asked to sign a personal guarantee.
Here are some tips on understanding personal guarantees:
Personal guarantees can be requested for a lease, loan, equipment purchase or anything else that takes on debt and transfers the risk to someone else. The bank or lender is looking to minimize the risk of taking a financial loss if you close your business.
Understand how the liability is structured before signing a personal guarantee. In some cases, the lender wants to place liability on you for the full amount if the business can’t pay, In other cases, they only want a portion of the amount owed
Understand the term of the guarantee. The term may state that you personally guarantee payment for a number of months or it may state that you personally guarantee that a minimum dollar amount will be paid regardless of the success or failure of the business. Once the business shows that it can pay its bills, you may not have to sign a personal guarantee.
Avoid signing a personal guarantee when possible. Sometimes you won’t be able to get necessary funding without it. If you decide to sign it, make sure the terms are as favorable to you as possible, and limit your liability.
Always speak with a legal professional or advisor before signing a personal guarantee.