Signing personal guarantees for business obligations is not uncommon for closely-held business owners. However, such guarantees put the personal assets of business owners at risk. If you are asked to sign a personal guaranty for your business, consider these options to lessen your risk:
- Ask that the personal guarantee be reduced or eliminated as the business reaches certain milestones. For example, after a certain number of on-time monthly payments are made or agreed-upon financial ratios are met.
- Request a limited guarantee based your ownership percentage. Lenders usually want unlimited guarantees no matter how many owners are involved, allowing them to collect 100% of the loan amount from any of the individual owners. If you have 30% ownership in the business, ask to limit your liability to 30% of the loan, and likewise for all the owners.
- Ask for certain personal assets to be excluded from the guarantee. Some states have statutes that exempt primary residences from being sold to satisfy creditors or limit the amount creditors can recover from the sale. Michigan’s exemption is extremely small – only $3,500 of equity can be protected. Ask if the lender will exclude your homestead or other assets that are important to you.
Regardless, once a good track record of creditworthiness is established for your business, you may find that your lender is more flexible with the personal guaranty requirements. It doesn’t hurt to ask!
If you have any questions about personal guarantees and how they can affect your business, reach out to us at (248) 477-6300 or firstname.lastname@example.org.