December 17, 2017

Personal Loan Guarantees for Business

After forty years of helping small business owners with their financial difficulties, I wish more of them understood how the personal guarantee can send them into bankruptcy. It’s difficult for self-employed people and small business owners to get capital, and the lack of capital is a big part of the reason business owners file for bankruptcy when their businesses stumble or fall — a vicious cycle for sure.

With the whole economy in upset, few small businesses can get credit and those who do usually succeed in getting a loan because one of the owners has signed a personal guarantee.

Ask yourself these questions

I ran across  an article in Inc. magazine earlier this year that I wish all my small business clients had read it before they signed personal guarantees:

Before filling it out, first ask yourself: Would it possible for me to follow through on this promise without greatly affecting my personal life?

“If you’re going to start a business, you’ve got to be willing to lose some money,” Short says. “But don’t lose your entire future, your house and your children’s college education by pledging too much.”

The second question you should ask yourself is: Is this a worthwhile investment? Remember: this business may be your baby, but it is still a business, and decisions made regarding it need to be level-headed and fiscally sound.

“You have to separate emotion from objectivity,” says Chuck Matthews, the executive director of the center for entrepreneurship, education and research at the University of Cincinnati. “The minute you get emotional about it, you’re going to make a bad decision.”

What happens when your business stumbles or falls

The very first thing a client must do when sitting down with me or any attorney is list business liabilities that the owner has personally guaranteed. Small business owners frequently make the mistake of putting everything in the business name but backing everything with a personal guarantee, making it very difficult to split the client from the business.

This fusion of business and personal entities shows up in the language clients use. They say “I did this” instead of “the company did that.” I call this the “I factor.” People with a high I factor have a difficult time making the right business decisions. A business is a business. It exists to pay its owners, not the other way around.

My law partner, Heather Culp, wrote about small business owner “separation issues” last year — a worthwhile read.

If you have signed a personal guarantee for a business loan that you are struggling to pay, seek competent legal counsel immediately. A bankruptcy counseling session can help you understand your legal position.