Personal guarantees are common in the construction industry, especially among smaller businesses that need to provide and extra level of protection to companies extending credit to them. In the event that the business defaults on a debt, the guarantor — typically the owner of the business or whoever signed for the credit — would satisfy the debt with their personal assets. For many smaller business owners, it offers an opportunity to tap capital you might not otherwise have access to, and as a result grow your business or address business space needs.
Let's take a closer look.
Here's what you must know about personal guarantees
Before you sign on the personal guarantee dotted line, here are several things you should know.
1. With a personal guarantee, a creditor can go after the guarantor's assets.
If you are a guarantor, that means any of your assets could be up for grabs if a debt goes unpaid. Personal guarantees are unsecured, and that means your house, your cars, your lake home, your boat, even your prized personal collection of artifacts could be used to satisfy the debt.
2. You should always consult an attorney before signing.
If you decide a personal guarantee is for you, be sure to consult with your legal partners and have them draft a personal guarantee clause for your credit applications. It's also essential to consult with your attorneys so that you fully understand your obligations under the personal guarantee. That way, there will be no unwelcome surprises or messy litigation down the road.
3. Small business owner? A personal guarantee is standard.
The Small Business Association (SBA) actually requires that any stakeholder who has more than 20% ownership of a business guarantee any SBA loan personally.
4. Bad credit? A personal guarantee may not work for you.
Perhaps it goes without saying, but a personal guarantee is only as good as the guarantor's credit. So if you are less than creditworthy, it may not be a good option for you. Poor credit shows that you may not have the money or assets to pay a debt if the business fails to make good on their promises.
5. A personal guarantee generally has no time limit.
All personal guarantees are unique, but for the most part, they do not have a time limit. That means you can be held liable for debt obligations at any time. If you stop working with the company responsible for the debt, you will likely need to negotiate with the company you used to work with to have the guarantee terminated.
Personal guarantees: sometimes essential, always thought-provokingPersonal guarantees can carry with them a great obligation, and therefore should never be entered into lightly. On the other hand, they can provide valuable leverage for securing additional, necessary credit for a business, in particular small businesses. If you are considering a personal guarantee, be sure to consult with your attorney to ensure your interests are protected to the extent possible.