Personal guarantees are incredibly common in business. If you own a small business and ever have to borrow money, rent space, or buy expensive equipment, it’s almost certain that you will at some point have to sign a personal guarantee.
Small business owners are often confused when a lender or a landlord asks them to sign a personal guarantee. Wasn’t the whole point of forming a Limited Liability Company, S-Corporation, or C-Corporation to protect personal assets from business creditors? Shouldn’t the lender or landlord be prevented from going after the owner’s personal assets if the business gets in trouble or goes under?
The answer is simple. Banks, landlords, and others know that your business entity most likely would protect your personal assets if your business defaults. That’s why they need a way to get around it, and they can only do that by having you sign a personal guarantee.
Personal guarantees come in many forms, but they usually require you to agree that in the event your business defaults, dissolves, or declares bankruptcy, the lender can recover money due, including penalties, interest, attorney fees and costs, directly from you with or without going after your business. They often include waivers of certain defenses you might otherwise be able to raise in a debt collection action. Spouses are often asked to sign as well, which would allow the lender to seek recourse against any assets held only in your spouse’s name.
Some personal guarantees, especially in the commercial leasing context, include restrictive covenants, terms requiring the business owner signing the guarantee to promise not to open a competing business within a certain geographic radius of the business that will be a tenant under the lease.
Many new business owners are intimidated by personal guarantees because they seem (and usually are) so severe and one-sided. Unfortunately, they’re unavoidable, and it’s sometimes the case that large institutions like banks simply refuse to change any of the material terms.
Even so, it is always a good idea to consult with legal counsel before signing a personal guarantee, or before agreeing to any significant business loan or lease agreement. An experienced business or commercial leasing attorney can provide a clear explanation of the guarantee’s terms, suggest changes that would be more favorable but still acceptable to the lender or landlord, and give you advice on the overall loan or lease agreement.