Are you personally guaranteed on anything?
I bet you are. Do you have an American Express business card? Do you have a loan from a bank for your business? What agreements have you made for your business?
One thing I’ve noticed is that the older a business is, the more likely it is that the owner (who is also often the CEO or president) has personal guarantees that he’s forgotten about.
And now’s as good a time as any to review all of your paperwork, find out where you’re personally guaranteed and take steps to extricate yourself from those guarantees.
If your business is successful and profitable, not in debt and established enough to no longer need the personal guarantee of your assets, home and your wife’s car, then try to get out of it.
Why Get Out of Personal Guarantees
Personal guarantees are pretty much what they sound like. They say that if something goes south with your business, you will stake your personal assets on making sure those invested can recover their losses.
So, if you have a business that one day goes belly up – even though in my experience these aren’t “one day” situations but long periods of strong indicators that you need to turn things around – the bank or whomever you have a personal guarantee with, has a legal right to try to recover its losses by going after your personal assets. Depending on the personal guarantee that means your money, your home or whatever else you have or staked could be up for debate and taking.
And that stinks.
If your business goes under, you don’t want to lose everything you have in the meantime. I can’t tell you how many dozens of times I’ve had clients tell me that they aren’t personally guaranteed or that there’s nothing to worry about on that front. Inevitably, when we sit down with all of their paperwork and start going back to the beginning, we find personal guarantees they didn’t know they had or that they didn’t think were still in force. But they were wrong. And they were at risk.
You don’t want to be at risk personally, and that’s why you want to try to get out of your personal guarantees – and not sign them in the first place if you can help it.
In All Kinds of Places
Personal guarantees appear in all kinds of places – and in some that seem relatively innocuous. I recently had a client tell me that when he was setting up credit card processing for his business, the merchant bank wanted him to sign a personal guarantee that if he didn’t pay his bill monthly – a simple, low, regular, monthly bill, mind you – then he would personally guarantee them the recovery of what they believed was due them. And at that, the structure of the arrangement was one that already allowed the merchant bank to withdraw money at its leisure from my client’s bank account.
We’re not talking about being out a lot of money here, but if this contract had a personal guarantee then imagine what other contracts you’ve signed have them.
Personal guarantees do serve a purpose – if your business has no credit or history and is a total risk then it makes sense that someone loaning you large sums of money wants you to be responsible for that money somehow. But if your business has been around a while or we’re talking about a monthly bill or something to that effect, then you need to think long and hard before signing any personal guarantees and about getting out of ones you’re currently in.
Just imagine over the course of 25 years how many personal guarantees you could actually have signed if you weren’t paying attention or didn’t know what to look for.
Have questions about how to get out of personal guarantees? Ask me in the comments section below.