Small business owners are frequently required to give a personal guarantee when applying for a business loan. It is important to understand the legal implications of a personal guarantee before executing the loan documents.
So what is a Personal Guarantee?
It is what it sounds like. The small business owner, who is borrowing money from the bank, is required to sign the loan documents on behalf of the small business and personally. The personal guarantee now allows the lender to seek reimbursement for the loan from the small business owner (personal assets) and the small business (business assets). Generally, the lender will not seek repayment of the loan by the owner unless or until the small business defaults on the loan.
The Small Business Administration (SBA) requires as follows:
“For all SBA loans, personal guarantees are required from every owner of 20 percent or more of the business, as well as from other individuals who hold key management positions. Whether a guaranty will be secured by personal assets or not is based upon the value of the assets already pledged and the value of the assets personally owned compared to the amount borrowed.”
If a small business owner agrees to a personal guarantee, the small business owner is agreeing to be 100% liable for the loan if the small business fails to make the payments. It is always important to seek the advice of our trusted team of attorneys and accountants when making lending decisions. While we often help clients in difficult financial situations we also assist clients to avoid the same financial pitfalls. One such pitfall is the personal guarantee for small businesses.
A personal guarantee, by a small business owner, can survive most financial events. For example, if a small business owner sells his/her interest in the business the personal guarantee can survive. Our team has the experience necessary to negotiate with lenders to remove the personal guarantees of small business owners from loans that have been defaulted. We help businesses reorganize their debt, this includes discharging underlying personal guarantees. With the right team your business, you, or your family can get a fresh start. Our team can help you avoid the common pitfalls of small business loans.
Call our team today. We have convenient offices in Greensburg, Latrobe, and Johnstown. Since 1985, we have been the trusted team for your legal and accounting needs.