10 Things Small Business Owners Need to Know About Personal Guarantees

In today's tight credit markets, more and more banks are requiring personal guarantees from applicants for business loans. These personal guarantees are just like they sound -- they are a personal promise to pay the business loan.

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This promise allows the bank to pursue the guarantor’s personal assets as an alternative source of repayment. 
At stake are all the assets a business owner has worked hard for years to accumulate, including his house, savings accounts, second home, cars, etc.
Because there are a lot of misconceptions out there, these 10 key points will help you understand what a personal guarantee is and how it works.

1. What is a guarantor? A guarantor is anyone who signs a personal guarantee, pledging personally to repay someone else’s obligation.  This pledge can be secured or unsecured.
2. When does a personal guarantee go into effect? A guarantee is in effect once a guarantor signs the agreement with the lender and remains in effect until the loan obligation is satisfied or the lender releases the guarantee. 
3. Who is required to sign a personal guarantee? Typically, a guarantor is an individual or entity with a relationship to the business that is borrowing money. This can include, but is not limited to:  small-to-medium size business owners, real estate investors, partners and family members.
4. What is a “joint and several liability” clause? This clause, found in many personal guarantee agreements, means a lender can pursue any one or all of the guarantors for the entire amount of the obligation. In other words, each guarantor is at risk for the full amount of the loan.  If a lender seeks repayment from only one guarantor, that person then would have to pursue repayment from the other partners.
5. Does filing for bankruptcy prevent a lender from pursuing personal assets? No. The lender may still be able to seek personal assets subject to a bankruptcy filing.
6. What about spouses? How are they impacted? If you are married, your spouse may have also signed a personal guarantee. In that case, should the business fail, your jointly owned possessions are on the line for the debt, as well as your spouse's assets and income.  If your spouse did not sign a personal guarantee, their individually owned assets are not impacted; however, your jointly owned assets may be subject to legal actions taken by the bank.
7. What are your options for limiting risk concerning a personal guarantee?  You can: a). decide not to take out the loan and remove any risk regarding a personal guarantee; b). find a credit worthy individual acceptable to the lender to cosign the guarantee (there is usually a fee for this); c). put some type of limit on the guarantee (e.g. – place a cap on the guarantee that is less than the loan amount).  d). Sign the guarantee and then purchase Personal Guarantee Insurance.
8. What if a business is incorporated? Doesn’t that protect the business owner/guarantor from a bank’s ability to pursue personal assets? No. If a business owner signed a personal guarantee, then the bank can absolutely pursue personal assets in order to repay the loan. 
9. Are business owners concerned about the potential impact when a personal guarantee is called? Yes. According to independent research commissioned by Asterisk Financial Group, 75% of business owners with personal guarantees have calculated the personal financial cost if it was called by their lender. This means that most business owners know what the impact on their lifestyle would be in this worst-case scenario.
10. What if I’ve exited the business? Am I still liable for the personal guarantee? Yes. The guarantee agreement remains enforceable until the obligation has been fully repaid or the bank releases a guarantor.  Typically, the bank only releases you from your personal guarantee obligation when the loan is paid off, even if you’ve sold the business and moved on.