You sign a loan for your business, assuming the corporation is the only party at risk. Then the lender asks for one more document: a personal guarantee. With that signature, your home, savings, and future income may be exposed.
A personal guarantee is a legal promise that you will personally repay the debt if your company cannot. It is not linked to a specific asset. Even if your business is incorporated, that structure does not protect you here.
Lenders often request personal guarantees when the business is new, lacks credit history, or is asking for a large loan. Some agreements even let the lender bypass your company and pursue you directly.
However, there are ways to limit your risk. You can ask for a cap on your liability, a clause that removes the guarantee after a certain period or repayment milestone, or a release if you sell your shares or resign. These terms are rarely offered upfront, but you may be able to negotiate them.
If your company defaults, some of the risks you face would be legal action, a judgment against your personal assets, or wage garnishment.
Signing a personal guarantee can be easy. Getting out of one is not. Sometimes it is necessary to access funding, but you should always understand the risks.
If you are being asked to sign or are unsure about what you signed, consult a lawyer before problems arise. Our expert team at the Ross Firm can help. Contact our office at [email protected] to set up your consultation.
Disclaimer: the above blog post does not constitute legal advice and is for information purposes only. We strongly recommend obtaining legal advice with respect to any legal issues.
