Often when people go into business or start a small business they really don’t think through the details of what they are doing day-to-day as it relates to the long term health of the business or their personal financial health.
A classic example is the Personal Guarantee. When you go into business you will need to make financial commitments to various parties like landlords, vendors, etc. Most of these commitments are promises to pay. The real question is “Who is promising to pay?” Is it your company that is promising to pay or is it you personally that is promising to pay…or is it BOTH.
When you go into business did you form a corporation? LLC? Hopefully you did because those things can give you some legal protections that, if something goes wrong, you’ll wish you had.
A personal guarantee from the small business owner is often requested/demanded by vendors and landlords when new start-up business gets started or even with established businesses. The idea is the the landlord or vendor doesn’t want to rely solely on your business (corporation or LLC) to pay a debt. If the business fails they want the business owner, YOU, to be personally on the hook for the obligation.
Before you sign a personal guarantee make sure you understand what that means and consult with an attorney, these things can be tricky. I would also recommend that as a business owner you avoid a personal guarantee whenever you can. Nearly all vendors/landlords say that the personal guarantee is required and standard but believe me…they are not always required.
If you have signed a personal guarantee you may have the opportunity to withdraw it after you have some experience with the vendor or when the time comes for a lease renewal. Keep track of any and all personal guarantees you sign. You don’t want an obligation you forgot about to bite you somewhere down the road.
Don’t just automatically sign a personal guarantee, push back and avoid it if possible.
Also, keep track of every personal guarantee you sign because someday you may need to cancel or withdraw it.
Finally, seek advice from an business attorney before signing any material contracts or personal guarantees.
Here’s an article you might find useful regarding business partners: