If you want to take out a small business loan to get your company off the ground, chances are the bank will ask for a personal guarantee. When you sign a personal guarantee, you are essentially putting your own assets up as collateral in case your business cannot pay back the debt. Inc. reminds readers that this might include property, home equity or other investments.
Some small business owners are so focused on acquiring their start-up capital that they fail to read the fine print of their personal guarantees and end up paying for it later – with interest. If you plan to take out a loan to help grow your business, you could benefit from talking to multiple lenders and hiring a contract attorney to negotiate for you.
- Share the risk.
If your company has multiple owners or investors, the bank may require each one of them to sign the personal guarantee. It's fair to spread the risk among owners, but try to negotiate with the bank so that each one is only responsible for the percentage of debt that corresponds to his or her percentage of ownership in the company.
Do not spread the risk too thin, though. For example, if your spouse does not sign the personal guarantee, you can protect assets that you two do not own jointly if your business fails.
- Request an end date.
In general, personal guarantees typically last “unconditionally and forever” for the life of the loan, but it is possible to negotiate an end date. Try requesting an end date if you make a reasonable number of payments on time, and the lender may be inclined to accept your terms.
- Limit the amount.
It may be possible to arrange the personal guarantee so that it only covers a portion of the loan. Additionally, some business owners who do not need a large loan to begin with try to avoid mixing their personal finances with their business funds by applying for a business credit card instead.
NerdWallet reminds readers that most business credit cards require personal guarantees, too, but for some companies, that is the easiest route to take.
Business law is complicated, but the right contract lawyer can help ensure your business thrives.
If you want to negotiate a personal guarantee that protects your best interests, turn to Eric D. Anderson Law, LTD. In addition to negotiating favorable contracts for our clients, our firm can ensure your company is complying with local, state, and federal regulations.
Take the future of your business in your hands; don't leave it up to the bank. Call 909-283-5494 to schedule a consultation with a Redlands contract attorney today.