How many personal guarantees have you signed? If you are like most business owners and CEOs, you most likely have a lot more than you think. The majority of CEOs I’ve worked with have lost track long ago of personal guarantees they have signed.
If you have an American Express business card, a business loan from a bank or you process credit cards, you have made a personal guarantee. You’d be surprised where personal guarantees show up, and you may have signed some without truly understanding the consequences. Vendors, creditors, banks and landlords could all have asked for a personal guarantee.
I had a client once who told me he was setting up credit card processing for his business and the bank wanted him to sign a personal guarantee for any customer charge backs and the recovery costs for the life of the contract. He was able to negotiate with the credit card processor that he would sign a limited personal guarantee for one year. If he paid his bill on time every month, then after one year the guarantee would automatically drop off.
While this particular contract would probably not have involved a lot of money if he had complied as originally requested, it’s an example of how prevalent these guarantees are and how you may be able to negotiate better terms when asked to sign one.
Should you ever experience trouble with your business, those guarantees could spell trouble. I’ve seen way too many unfortunate consequences of business owners who did not keep track of or understand the consequences of these personal guarantees. They have lost homes, money, yachts and prize-winning horses to the person who held the strongest personal guarantee when their business failed.
One CEO thought his house was safe because it was in his wife’s name and he thought she hadn’t signed anything. But I found that she had signed a document at one point that put their house in jeopardy.
If a business is just starting out and has no credit record, then it’s customary to be asked for a personal guarantee by the bank or person who is risking their money or property. The bank has no other way of ensuring that the money will be paid back. But there is room for negotiation, as my client discovered.
All personal guarantees last forever but you can ask that the guarantee be dropped after a certain amount of on-time payments, as he did. Another option is to ask that the amount of the personal guarantee be limited to a percentage of the total amount or if you are willing to pay a higher interest rate, you could ask for the personal guarantee to be dropped altogether.
The important thing about personal guarantees is that you keep track of them and how much you have at risk. And if your business has been around for awhile and has established good credit, then you could ask to have the personal guarantee removed.