Before you sign on the dotted line, take time to understand what these two words mean and what your potential liability could be.
After dealing with landlords and financial institutions across the country for over thirty years, we have developed several successful techniques and strategies that deal with the personal guarantee dilemma. Below you’ll find some basic information to help you understand what this term really means.
What do they mean by “personal?” "Personal" means you: the individual, the owner of the company. It doesn’t mean your dba (doing business as) name; it means you.
What do they mean by “guarantee”? A guarantee (or guaranty) is a promise made by one party to pay the debts or perform the obligations of another party and is usually provided as an inducement for a landlord or a lender to enter into an agreement with the first party. In the case of a company, the guarantor would be a director, shareholder, partner, etc. In the case of an individual, the guarantor would be a spouse or other family member. The word "guarantee" means a "pledge" or "assurance." Therefore, the term "personal guarantee" translates to you providing your own individual pledge or assurance for an obligation.
Potential liability (You Bet!)
Anyone in business who signs a personal guarantee needs to understand that these words mean what they say. So before putting their signature on a personal guarantee, entrepreneurs need to consider very carefully the potential impact of these two words. The scenarios below illustrate real possibilities for you to consider.
Impact Example #1: You sign a lease for an office or retail space and you give your personal guarantee. Several months later, your company can’t pay the rent and goes out of business. If your now defunct company fails to make its rent payment as scheduled in the lease, the landlord can then collect directly from you.
Impact Example #2: You want to lease office or retail space for your newly formed corporation, and the landlord requires a personal guarantee from you on the lease obligation. If the corporation fails to make its payments on time, the landlord can then collect directly from you. This is possible because the person who signs the personal guarantee is like a co-signer on a loan; the landlord will come to this person once it's been determined that the primary borrower cannot meet the financial obligation. This situation could pertain to an equipment lease, a partnership agreement with a person or other firm, a real estate lease with a landlord, or various types of loans.
Impact Example #3: When Randy Smith, owner of (dba) Prime Time Fitness, signed a personal loan guaranty and failed to make the company’s payment on equipment the company leased, he discovered there was no liability protection inherent in the company's organizational structure. He found out the hard way that the dba he filed is essentially a proprietorship with an operating name different from his name. So even though the dba appears on certain contractual documents, that business is still one and the same with Randy Smith.
These examples, in which individuals on behalf of their troubled businesses are required to continue to pay rent or loan obligations even when they're not occupying the leased space or in possession of the loan proceeds lent to them, highlight the necessity of protecting yourself and your family from the impact that one of these agreements can have.
Personal guarantees are very real. Although they are common as a contingent liability, you must know before you sign what to do to protect yourself.
Expect to be asked for personal guarantees, but plan your strategy to negotiate out of them. For help on how to effectively handle Personal Guarantees, please call us at 1-925-672-4800 or email us by clicking here.
Courtesy of Worksolutions.com