Should you avoid personal Guarantees?

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Unless you don’t fully understand what you are signing don’t sign it.

 

So you want to take all the risk?

A personal guarantee is a written promise to guarantee the liability of one party for the debts of another party. Commonly, personal guarantees are given by directors and shareholders of companies to personally guarantee the payment of money or obligations on behalf of their company.

Like most people, you tend to think the risks are not that big and you can handle them.  You have probably heard these lines. “A personal guarantee is no big deal, it’s just a requirement of the bank”, “everybody signs it, it’s nothing to lose sleep over”, “we never sue unless we think we’re being deceived or defrauded and I sure you won’t be doing that, will you”? There is a big difference between words and reality.

When a personal guarantee is called in, you will pay dearly in sleepless nights, guilt, and shame, and it can cost you many years of emotional strain.

Tell your family the truth about the personal guarantee, upfront. You can’t put your home and bank accounts on the line without telling your spouse. You’d be amazed how few businessmen tell their wives when they do this.

If possible, don’t guarantee an obligation for a business you don’t own outright. If your stake is just 25 percent, you might think you’re okay, but they can and will still go after you for the whole indebtedness. Most creditors don’t care and they will go after the people with the money. even though they may not have caused the problem.

 

“A big smile and a friendly face do not guarantee a creditor won’t come after your personal guarantee if there is a default”. Peter Sergeant

 

Unless you own the business outright, think carefully about obligating yourself. Ask the lender if you can limit the personal guarantee to your share.

Have a written agreement with the company and your partners that no matter who gets sued on the personal guarantee, the others will pay their share.

Try to make the agreement better for you. There are many ways to modify a personal guarantee, but it’s harder to do in this credit environment. Nevertheless, you must ask. You might even get the bank to agree that the personal guarantee won’t be enforced unless there’s been a fraud. As I tell people, you can walk into the bank and say: “I love my wife more than my banker, so no guarantee over the house or I’ll find someone who will.”

Seek insurance for your personal guarantee. Don’t wait on this one as by the time the guarantee is called, the game is over. Your equity may be wiped out, your business may be in default, and you haven’t protected yourself.

Personal guarantee insurance is available now, though it wasn’t when I signed my personal guarantees. It would have given me the bargaining leverage and peace of mind I really needed at the time.

Take it from someone who learned the hard way don’t overload yourself with debt and always avoid personal guarantees.

 

[read more=”Personal Experience” less=”Personal Experience”]

Personal Experience

Over the years, I have helped many clients avoid the risks of signing a personal guarantee.

Signing a personal guarantee gives your creditors the right to pursue personal assets if your business defaults, even before the business assets are liquidated. They tend to act quickly without fear or favour.

I have also experienced first-hand creditors forgoing debt it the persons involved has always acted with integrity and the causes of their misfortune were beyond their control, such as a drought. Even so don’t take the risk and never assume your debt will be forgiven.

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