Rory Brown of Charleston, SC Reveals What A Personal Guaranty Is?

What Is a Personal Guaranty?

A Personal Guaranty is an unsecured written promise guaranteeing payment on a loan, lease or other obligation in the event of default. Because it is unsecured, a Personal Guaranty is not tied to a specific asset.

Should I Sign a Personal Guaranty?

Generally, no, if you can avoid it. Personal Guarantees are often requested or required by lenders and landlords from the majority owner(s) of a business as a condition of the extension of credit. The Personal Guaranty is also used by creditors as a means of additional security in the event of default. If a default does occur, the creditor may then seek to collect any shortfall directly from the guarantor.

Is My Personal Guaranty Secured?

The majority of Personal Guarantees are unsecured. The obligation is not secured by collateral, such as a home or automobile. However, in the event of nonpayment, the creditor can use the legal system to obtain and enforce a judgment seeking satisfaction through your personal assets.

Why Do Creditors Want a Personal Guaranty?

A better question is: Why wouldn’t they? Statistics show that business owners who sign a Personal Guaranty are more committed and motivated to see their businesses succeed. The guarantors strive to pay their creditors through the business rather than from their personal assets. Personal Guarantees provide two major benefits for creditors: they lower the risk of default; and the provide the creditor the ability to offset potential losses in the event of a default.

How Can I Avoid Signing a Personal Guaranty?

Creditors may be willing to limit or waive a Personal Guaranty in following circumstances:

• the Company has the ability to support the credit obligations based upon historical cash flow;
• the Company has the ability to provide adequate security through cash, receivables, or real property;
• there is a previously existing guaranty in place; or
• the ability of the Company to pay a higher interest rate in lieu of a Personal Guaranty.

Negotiating a Personal Guaranty

Prior to signing a Personal Guaranty, consult with a trusted advisor, such as an experienced entrepreneur or a lawyer. Signing a Personal Guaranty may require you to guarantee the credit extended to your business in the event of default which could include rent, interest, default fees, court costs, and other legal expenses incurred by the creditor. It’s to your benefit to understand the risks involved and prior to signing a Personal Guarantee, consider limiting the following:

• amount of your personal assets that are at risk;
• amount of your guaranty to a fixed amount or as a percentage of the outstanding balance;
• period the Personal Guaranty is outstanding; or
• events of default and when the guaranty can be enforced.

Conclusion

A Personal Guaranty may allow you to obtain credit for your business, but is it the best option? There are many factors to consider, and only you know your business and your circumstances. The key is to limit the amount of your personal risk in the unfortunate event of default, so good legal and financial advice is important when making a decision on whether to provide a personal guaranty.

About the Author: Rory Brown is a Managing Partner of Nicklaus Brown & Co. and the Chairman of Ad Genius, Armada Cloud, Goods & Services, and Nearshore Technology Company. He was named the Financial Services Entrepreneur of the Year by Ernst & Young and has been featured in well-known industry publications including Money Magazine, INC 500 and The Economist. Mr. Brown received his MBA from the University of Charleston and is a Certified Public Accountant. He currently resides in Charleston, SC.