Throughout the business loan application process, you are going to sign quite a few documents. One of the most important signatures on the loan document is the personal guarantee, yet often times business owners don’t fully understand what they are signing here. Additionally, when you see the light at the end of the tunnel and you just want to get your loan to further your business, you may not be likely to read in depth what exactly you’re signing.
A personal guarantee is insurance for the lender in the unfortunate circumstance that you are unable to pay back your loan someday. By signing a personal guarantee, you are putting your personal finances on the line as collateral for your business loan, so that lenders have money to go after even if your business goes under. The personal guarantee becomes a huge factor in determining the actions that a loan provider can take. This is why it is crucial to understand the terms of this personal guarantee before simply putting your signature down and taking your money. Two of the most common types of personal guarantees are Unlimited Personal Guarantees, Limited Personal Guarantees; however, there can often be some types of personal guarantees that are a hybrid of these two types.
Unlimited Personal Guarantees
Unlimited personal guarantees, as the name suggests, allow the lender to recover the entire loan amount, plus interest and legal fees, by whatever means possible, if your business goes under or if you default on your loan. This means they can take money from your retirement, savings, college funds, etc. The kicker here is that if there isn’t enough liquid cash available to cover the entire loan, they can come after physical property as well, such as your house, car, or any other assets.
Limited Personal Guarantees
For this form of personal guarantee, there is a set dollar limit which the lender can collect from you personally (as the borrower) if you default on your business loan. This is a common type of guarantee among companies that have multiple business partners, that way each person has a defined piece of debt should the company go under.
There are a few types of limited personal guarantees that can be signed by company’s owner by multiple business partners. There are “several guarantees”, and there are “joint and several guarantees”. For several guarantees, each partner has a predetermined percentage of liability, meaning you know right from the beginning the maximum you might owe if the unthinkable happens (which would be a fixed percentage of the loan and is usually related to the percentage stake in the company). For a joint several guarantee, the lender can seek the entire amount of the loan no matter who it comes from. So if your business partner disappears when things go south, or if your partners don’t have sufficient finances to cover the loan, you could be on the hook for more than your fair share of the loan.
The main takeaway from this article is to inform you that you should always read, in-depth, everything you sign, especially if you’re signing a personal guarantee. Knowing the position you would be in if your company went under is very important. You should always have a plan for the worst case scenario, even if you don’t expect this to ever happen. When planning your future, knowing your legal rights and legal standing in terms of business loans is important to create a broad picture of what you could actually be on the hook for.