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Most lenders require the individual owner of a small business to personally guarantee loans made to a business. This pledge indicates the owners' commitment and helps ensure that the loan obligation won't be abandoned.
The problem: A personal guarantee means your personal assets are available as collateral. It opens an individual — or a husband and wife if they both sign — to personal legal exposure.
Even if it's difficult to avoid giving a guarantee, the following five steps can help limit exposure:
Here's an example of why you should proceed with caution:
An entrepreneur applied for a $1 million loan to modernize his operations. The bank agreed, but asked for a second trust on all of the firm's real estate. In addition, the lender demanded that all other company assets be put up as security and that both the owner and his spouse personally guarantee the note.
If the owner agreed to these terms and needed to borrow additional funds in the future, he would have been out of luck — and possibly out of business. All of his company and personal assets were tied up to secure the loan. There was no collateral available to obtain additional financing for new opportunities.
With advice from his CPA, the owner balked at the demands and the lender agreed to take only $1.2 million of collateral on the $1 million loan.
So while personal guarantees are usually required, you may be able to minimize the impact.
*Securities offered through 1st Global Capital Corp. Member FINRA, SIPC. Investment advisory services offered through 1st Global Advisors, Inc. We currently have individuals licensed to offer securities in the states of AL, AZ, CA, CO, CT, FL, GA, HI, ID, IL, IN, KY, MI, MS, MO, NV, NJ, NC, OH, RI, TN, TX, WA, WV and WI. This is not an offer to sell securities in any other state or jurisdiction.