WHAT IS A PERSONAL GUARANTEE AND HOW DOES IT AFFECT YOUR BUSINESS?
If you are a small business owner, you may have come across the term ‘personal guarantee’ at some point. It is a term that is frequently used in business loans, leases, and contracts. The question is, what exactly is a personal guarantee and how does it affect your business? In this article, we will break down the concept of personal guarantees and its implications for your business.
DEFINING A PERSONAL GUARANTEE
A personal guarantee is a legal binding agreement made by an individual to uphold the financial obligations of their business. Every time you as a business owner sign a loan agreement or a lease on behalf of your business, you may be required to sign a personal guarantee. By signing this agreement, you agree to take personal responsibility for the debt if your business fails to make payments.
IMPLICATIONS OF PERSONAL GUARANTEES
Personal guarantees provide lenders, landlords, and other creditors with an added layer of security to ensure that they can recover their money if your business fails to keep up with its financial commitments. This means that if your business faces financial difficulty and is unable to make payments, the creditor can legally come after your personal assets, such as your home, car, or bank account.
WHAT TO CONSIDER BEFORE SIGNING A PERSONAL GUARANTEE
Before you sign a personal guarantee, it is important to consider the implications it could have on your personal finances and credit score. Here are a few things to keep in mind:
1. Evaluate the risk: Take into account the likelihood of your business defaulting on its financial obligations. If your business has a high risk of failure or is in a highly competitive industry, you may want to reconsider signing a personal guarantee.
2. Negotiate for better terms: Some lenders or landlords may be willing to reduce or eliminate the personal guarantee clause. Consider negotiating better terms that offer less personal risk.
3. Seek legal advice: Always consult a lawyer before signing any legal agreements, especially if it involves your personal finances.
EXAMPLES OF PERSONAL GUARANTEE GONE WRONG
To better understand personal guarantees, let’s take a look at some real-life examples:
1. ABC Hotel Inc. signed a personal guarantee to secure a loan for their hotel business. However, the hotel industry took a downturn, and the business was unable to keep up with loan payments. As a result, the bank went after the owners’ personal assets, including their family home.
2. DEF Corporation signed a lease with a personal guarantee for their office space. However, a year later, the business was acquired by another company, and the new owners decided to move the office to a different location. The landlord demanded the remaining lease payments, but instead of pursuing the business, they went after the former owner’s personal assets.
CONCLUSION
In conclusion, personal guarantees are a common requirement in business loans, leases, and contracts. They provide an added layer of security for creditors but could have significant implications for your personal finances. Before signing a personal guarantee, evaluate the risk, negotiate better terms, and seek legal advice. Remember that in the event of your business’s financial difficulty, the creditor has the legal right to come after your personal assets.
(Note: Do you have knowledge or insights to share? Unlock new opportunities and expand your reach by joining our authors team. Click Registration to join us and share your expertise with our readers.)
Speech tips:
Please note that any statements involving politics will not be approved.