The next tip for those who own, or want to own, a small business: BEWARE OF PERSONAL GUARANTEES.
I have represented several individuals in the last year who signed personal guarantees and then were sued on that guarantee. A personal guarantee can come up in several situations.
The first situation that comes to mind is when a small business enters into a contract to lease office space and the landlord requires the business owner to personally guarantee payment of the lease. Or, if a small business wants to set up an account with a new vendor, the vendor might require the business owner to personally guarantee payment for the products being provided.
In your personal life, a guarantee situation could arise where one family member signs a guarantee to secure payment for another family member. Think of a parent co-signing on a car loan for an adult child.
One of the main reasons that lenders require personal guarantees is that if the main borrower does not pay, then the lender can go after the guarantor. So in the office space lease situation, if there is a default on the lease, the landlord can sue the business who entered into the lease and also sue the owner of that business, i.e., the guarantor. If the landlord wins that lawsuit, the landlord can then go after the business’ assets, and if the business no longer has any assets by that time, the landlord can also go after the business owner’s personal assets to obtain payment. Or, in the parent co-signing for the child situation, the lender can go after the parent’s personal assets to secure payment for the loan.
Moral of the story: consider the long term consequences before you sign a personal guarantee. If you do sign a personal guarantee, you have to be willing to pay on the debt if the main borrower, whether it’s your business or your child, fails to pay. And, be sure to read all of the terms of the contract and guarantee before you sign so you understand the terms and conditions of the loan.
The information contained herein is general information not legal advice, and does NOT establish an attorney-client relationship with Lori Brown.