Business Lender and Personal Guarantees

When a Business fails, what can happen to the owner?

Here are some common questions and answers about personal guarantees on business debt.

Question:  What are the basics every business owner needs to know about personal guarantees?

Answer: Normally when a business owner signs a loan on behalf of its business, the creditor can only seek collection against the business entity. However, if the owners signs a personal guarantee, he is committing to a personal repayment of the debt if the business is unable to pay it. This means that the creditor can enforce the loan against the business owner personally.

Question:  Are there certain types of lenders that require personal guarantees?

Answer: Most business loans have personal guarantees. Most SBA loans (but not the recent Coronavirus programs), credit cards, bank loans and even commercial leases will require the owner to sign a personal guarantee. Lenders that usually do not require personal guarantees would be industry vendors, utility and service providers, and some factoring companies.

What language should you look for regarding personal guarantees in loan contracts?

Answer: The language is pretty standard and simple. In a commercial lease of more than 3-5 years, you might negotiate the personal guarantee with the landlord to reduce exposure. An example would be a five year lease where the personal guarantee only applies for the first year.   Also with certain types of lenders you need to watch out for language that grants the lender an automatic “consent to judgment” if you default on payments.

Are there certain types of businesses that have to give a personal guarantee?

Answer: Of course some businesses are riskier than others, such as those in the hospitality industry and service businesses, but in general the answer to this questions relies more upon the type of lender than the type of borrower.

Question:  Are assets ever required for a personal guarantee? What kind?

Answer: see above and below, but also note that most equipment lenders will file a UCC lien on the equipment as part of the loan. This means that if you do not pay, the lender can repossess your equipment.

Question:  Are there certain SBA loans that require personal guarantees?  Which ones?

Answer: traditional SBA loans will require a personal guarantee as they are based upon credit and collateral. If a business owner has a home, the SBA lender could require it as collateral.

Remember, if you are struggling with business or personal debt, a consultation with an experienced attorney can help you with asset protection.  If you wish to schedule a consultation, call us at 813-221-3759 or use our easy Contact Us form.