Be Mindful of Personal Guarantees In Business

As a business owner, you have established a corporate shield in an effort to separate your personal assets from your business matters. However, one of the potential pitfalls that you should be aware of – personal guarantees.

In certain situations, businesses may encounter difficulties when trying to secure a loan, negotiate a commercial lease, or enter into other agreements. This can be due to limited credit or assets. In such cases, the other party may request a personal guarantee. A personal guarantee means that the owners become personally responsible for the company’s debts in case of a default.

In essence, by signing a personal guarantee, you bridge the gap between your personal and business credit and assets. This can erode the protection that your corporate/entity structure typically offers against personal liability in business matters.

To protect yourself and your business, it’s important to be vigilant when a personal guarantee is sought in business matters and to explore alternatives to avoid it if possible. Here are some potential strategies you may choose to consider in your judgment:

Seek Alternative Vendors: Look for vendors or partners who do not require a personal guarantee.

Demonstrate Strong Business Financials: If your business is financially stable and has a solid credit history, you may be in a better position to negotiate without a personal guarantee.

Offer/Increase Collateral: Providing collateral can sometimes replace the need for a personal guarantee. You can try to reassure the other party without exposing your personal assets.

While it may require more effort and negotiation upfront, avoiding personal guarantees can reduce a business owner’s risk. It hopefully keeps your personal assets separate from your business obligations, preserving your corporate shield.

As a business owner, it’s important to be mindful when personal guarantees are involved in business agreements. Negotiation or avoidance of them may be prudent.

This blog post summarizes one example of ways that help business owners avoid personal liability for the obligations of the business. If you need assistance with your business law matters, don’t hesitate to reach out to our firm. Click here to contact Guala Law Firm if you need legal advice or assistance.