Know the Risks of a Personal Guarantee for Your Business Loan

For many small business owners, especially those who are just starting out, avenues for raising operating capital may be rather limited. If you are in such situation, you may have no choice but to apply for loan that requires you to offer a personal guarantee of its repayment. Over the years, many of my clients have come to me asking about the potential pitfalls of personally guaranteeing a loan, and while a personal guarantee business loan may be necessary, you should certainly understand what may be expected of you.

Personal Guarantees and Common Lending Practice

Many lending institutions, especially smaller community banks, will require you to personally guarantee a loan for your business. In fact, even loans backed by the U.S. Small Business Administration require a personal guarantee from all owners with at least a 20 percent stake in the company. As your business grows and establishes its own equity, you may eventually be able to avoid such requirements, but as you try to get to that point, you may have little choice.

Personal Assets at Risk

When you started your company, you may have chosen a business structure, such as an S-Corporation or an LLC, with the goal of reducing your personal liability related to the company’s operation. Personal guarantees, however, tend to blur the line between personal and business assets. When you offer a personal guarantee for a business loan, you promise to pay back the loan using your own financial resources, even though they are not part of the business. While a personal guarantee can be seen as your vote of confidence in your company, unforeseen circumstances could result in personal financial disaster, causing you to lose your home, vehicles, or other property of value. Your obligation for the loan may continue long after your business has been dissolved or sold.

Risks for Co-Owners and Co-Signers

In many cases, a lender will require that all of a company’s co-owners personally guarantee the loan. Some will even want your spouse or other family members to co-sign. While asking co-owners to assume responsibility is relatively logical, be wary of the language in the guarantee. Each of you—no matter how many there may be—could be held responsible for the full amount of the loan if your loan agreement does not explicitly specify otherwise. A business law attorney can help you negotiate with lenders to ensure that, if a personal guarantee is necessary, the extent of each co-owner’s liability is relative to his or her share in the company.

Knowledgeable Legal Counsel in Illinois

If you are considering a business loan that requires a personal guarantee, it is absolutely critical that you fully understand the terms of your loan agreement. Contact an experienced Naperville business law attorney at the Gierach Law Firm today to schedule a consultation. We can help you review your loan documents and negotiate with lenders to help protect your future and that of your business. Call 630-228-9413 and put our team to work for you.