You passionately believe in your business endeavor. You are committed to seeing it succeed, but need cash to get it off the ground. So, you drive down to your local bank to see about a business loan. Bill the Banker evaluates your loan application, approves it, but wants you to sign a personal guarantee as well. You figure, why not? I wholeheartedly believe in my business so there isn’t anything to worry about, right?
Before you do sign that paper, consider the potential ramifications. A personal guarantee is your pledge that you will make good on the loan, usually without exception. This guarantee extends beyond the shelter of your corporation, or the burden of your partners to belly up to the bar and pay. It means you and you alone are going to pay the loan regardless if the business goes under with a mound of debt and is dissolved.
If you are a sole proprietor, a lender may have the right to sue you personally and confiscate your personal assets to satisfy the loan. If you’re married, they may require your spouse to sign the agreement as well. When they do, jointly owned assets such as your house are on the line for the debt, as well as your spouse’s assets and income.
The reality may well be that you have no choice but to issue a personal guarantee if you have no other options for cash. Even the Small Business Administration (SBA) requires that all loans they guarantee be personally guaranteed by any person with a 20 percent or larger ownership interest in the business. Still, it should provide you with an opportunity to step back and make sure all your ducks are in a row, and that you are ready to make that type of personal commitment to your business.