Why A Personal Guarantee Is Nothing To Fear

Written by Dave Choate on March 29, 2012 in Business Insights, Finance And Lending - 4 Comments
Personal-Guarantee

Depending on who you listen to, a personal guarantee is either no big deal or a guarantee forged by demons in the fiery depths of Mt. Contract. That can skew your view a bit.

Today, PointBlank is here to explain why a personal guarantee for a lease or loan is nothing to fear. In fact, signing a personal guarantee can lower the costs associated with your lease and save you a lot of headaches. Unless you’re extremely likely to default—in which case we’d caution you to strongly consider your options before getting a loan in the first place—a personal guarantee is actually quite beneficial if you need a business loan.

It wouldn’t do to leave it at that, especially if you’ve heard horror stories. So let’s go through why a personal guarantee is no bogeyman…er, guarantee. Hat tip to Direct Capital’s Matt Sullivan and Scott Lynch, who provided some of this helpful advice.

4 Reasons You Should Embrace The Personal Guarantee

  1. A personal guarantee on a lease ensures there’s no hits, pings, dents or cracks in your personal credit unless you default. Without one, you may not get so lucky.
  2. In the case of equipment leasing, which nearly every small business will need at some point, Sullivan notes that the guarantee is limited to the amount of the lease. While it would still be painful if you defaulted, the company would be limited in what they could recoup from you. That should give you a little peace of mind.
  3. If you’re a small business owner and you’re critical to the success of your business, a personal guarantee goes a long way toward reassuring lenders. For example, “Bizowner & Sons” would be in rough shape without Bizowner, as Sullivan said to me.
  4. Ultimately, loans have risk associated with them. I’m not going to pretend you get a free pony with every equipment lease and that nothing bad will happen ever, because there is risk. What a personal guarantee does is reduce that risk, reduce the cost of the loan and ensure that you assume the loan responsibility if your business can’t.

If you’re certain you can make it through the loan without a default or you’re able and willing to put your assets up, you will get a better deal on your loan every time. That’s the magic of a personal guarantee, and that’s why you shouldn’t fear it.

Tell us about your experiences with personal guarantees in the comments.

 


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4 Comments on "Why A Personal Guarantee Is Nothing To Fear"

  1. Scott N March 29, 2012 at 12:10 pm ·

    Personal Guarantee’s are hard to avoid in business leases, equipment leases and business loans. I agree that you have to just get over it and not fear them. Standard practice…

    However with many vendors, if your business has existed a number of years, say 5+ or even 10+ you can push back on them and not sign a personal guarantee. Hard to avoid in year 1 though.

  2. Dave Choate March 30, 2012 at 4:44 pm ·

    Good advice, Scott! Thanks for that.

  3. Jules April 9, 2012 at 8:34 am ·

    Hello All,

    An interesting topic!

    In my experience, and those of my business customers, it can be very hard to avoid “Personal Guarantees” in certain situations!

    That said, my feeling is that a personal guarantee should be given as a last resort – as the banks are ruthless at persuing these should anything go wrong!

    My experience tells me that if you have enough assets to offer a personal guarantee – then this alone is a sign of success – without physically offering it up for security!

    Read one experience of a business contact that I included on my website – Natwest Bank hounded her to death (legally speaking) and managed to enforce a personal guarantee long after it should have expired, been torn up and shredded!

    So, my advice is try everything to avoid a personal guarantee.

    However, if you cannot negotiate it away, and if you are left with no choice and you have to offer them one, then insist on 1) a time limit attached 2) enforcing the return of the original signed documents after the period expires!

    If you want a horror story, read this: http://www.starting-a-business-guide.com/small-business-loans.html

  4. Dave Choate April 9, 2012 at 8:45 am ·

    Appreciate the perspective, Jules. I do believe if you’re careful going in and you’re working with a scrupulous company, you shouldn’t have anything to fear from a personal guarantee. Your comment is a good reminder of what can go wrong, though, and that needs to be said.

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