Business Owners and Entrepreneurs: Understand all the risks and rewards from having to sign a Personal Guarantee!
It is common for owners of new companies to be asked to sign a personal guarantee for anyone extending “credit”. Landlords, Suppliers, Financial Institutions and any other sources that may extend credit to your business may ask you to sign. This is normal, as these sources want some assurance that they will be paid since your business is new and essentially has no profile or past performance to review. In a perfect world, your company will be able to pay all its obligations on time and the personal guarantee will never come into play. However, everything does not always goes as planned. A lot of business owners are so thankful to be approved for their desired credit, that they sign these guarantees without fully understanding the risks to their personal assets.
Examples of worst case scenarios with personal guarantees: if your business becomes unable to pay its obligation, the funding source can demand for payment of the full amount owed from you personally; if your business defaults on its lease, the landlord can come after you personally, and you may be liable for the rent for the rest of the term of the lease.
It is important to explore other options before signing personal guarantees that are presented to you and attempt to negotiate. There are a number of risk limiting measures that can be explored: personal guarantee insurance; carve-outs; limits; and much more.
Contact C&G today to make sure you are making the right decisions!
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