The Truth About Personal Guarantees

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Many small business owners have heard stories of a personal guarantee gone wrong – of John Doe not only losing his business, but his home and all of his personal assets as well.  Though this scenario is certainly possible, most small business owners have only heard one side of the personal guarantee – the doom and gloom side.

The personal guarantee means almost exactly what it says,  you are personally guaranteeing that you will be responsible for the payback of the loan if your small business winds up defaulting.  It makes sense, if you think about it.  If you’re the owner and operator of the business, whether that business succeeds or fails, for the most part, lies in your hands.  Right?

Sure, it sounds pretty scary, but there’s no better way to say to your lender that you stand by your business and have faith, beyond a shadow of a doubt, that you are able to make it work.  If you’re confident in your business and the ability of your business to recoup the money you’re borrowing, then the personal guarantee goes a long way in helping to keep the cost of your loan down.  It could even mean the difference between you even getting the loan in the first place or walking out of the lender’s office empty handed, especially during a particularly challenging economy.

A personal guarantee isn’t for everyone, though.  If you think there’s a good shot that you’d wind up defaulting, maybe you should reconsider taking out that loan in the first place.   With most equipment leases, the personal liability is limited to the amount of the lease, so think about limiting the amount of the lease to a number you feel comfortable with.

Have you ever signed a personal guarantee? Direct Capital would like to know!
Direct Capital is a leading provider of small business financing in the United States.

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