Entrepreneurs and small business owners usually have to take up loans for their business when they run low on funds. A loan can help you meet business expenses such as payroll, take advantage of opportunities in your market, and build a credit profile for your business. When you do get a loan from a bank or private lender, you might be required to sign a personal guarantee. A personal guarantee is pledge of your personal assets —real estate, savings, securities— to be liquidated to repay a loan to your business if your business defaults in paying the loan.
Many business owners are easily carried away by the thought of getting a loan that they forget to take a moment to read the fine print before signing their name on the personal guarantee. However, a personal guarantee sorts of blur the line between where your personal finance ends and your business finance begins. This article provides insight into 4 tips that can help you negotiate a personal guarantee in which your assets are protected.
1. Spread out the risk
If you are not the sole owner of your business or if you have other investors, you can spread out the risk of the bank’s personal guarantee among all the people with equity in your business. Having all investors with equity in the business sign up for a part of the personal guarantee limits your exposure to property forfeiture in the event that your business is unable to repay its debt. If you own 60% of the business and another person owns 40% of the business, you can negotiate to split the personal guarantee such you are only liable for 60% of the loan while the other partner is liable for the remaining 40%.
2. Personal guarantees should have a short tinme frame
Banks and private lenders will make you feel as if you are under obligation to accept their terms and conditions on the personal guarantee. Hence, they may want to you to sign a personal guarantee that unconditionally lasts the term of the loan. However, you can negotiate with the lender such that the personal guarantee only makes you liable after the loan has remained unpaid for a certain term after its term. You can also negotiate to reduce the size of the liability in the personal guarantee as you continue to repay parts of your debt.
3. Make sure there’s a limit on the amount you guarantee
When negotiating your personal guarantee, you can request to put a cap on the amount you’ll guarantee. Limiting your personal guarantee to a portion or percentage of the loan protects you from losing all of your personal wealth in the event that your business has financial troubles and you are unable to make your debt obligations. Hence, for a £145,280, you can negotiate to have your personal guarantee cover only up to £72,630 of the loan so that you don’t have to sell all of your assets to repay a £145,280 debt.
4. Protect some of your key assets
Some states such as Texas and Florida have laws designed to protect you from losing your house in the event that you are unable to pay a debt. Even if you are becoming financially insolvent, you can still protect some of your assets from bankruptcy; hence, nothing stops you from limiting the extent to which a lender can take your personal assets to repay a loan. However, if such a protection is not available in your state, you can still choose to have provisions that exclude some of your assets from liquidation in your personal guarantee.