You’ve probably heard the old saying, “you need to spend money to make money.” Anyone who owns a small- or medium-sized business probably knows that to be true. And many owners also quickly learn that it may be necessary to borrow money at some point either to get through a dry spell or take advantage of a growth opportunity.

 

There are certainly plenty of lending products available to help small- and medium-sized business owners, including working capital loans, business lines of credit, equipment financing and merchant cash advances. Criteria such as personal and business credit scores, length of time in business, annual revenue, business industry and size, balance sheet and income tax returns may be required to determine if your business qualifies for a loan—and for how much—and signing a personal guarantee may also be part of the approval process.

 

A personal guarantee is an unsecured written promise from the business owner ensuring the lender will be “made whole” in the event of non-payment. In other words, the lender can go after the owner’s personal assets if the business’s loan is not repaid as agreed to.

 

What do you need to know about personal guarantees if you are a business owner? Here are answers to some commonly asked questions:

 

Why do lenders require a personal guarantee? Call it extra peace of mind for the lender that the owner is committed to repaying the loan, added assurance if you will and an extra sign of commitment and confidence. If the payments are made as per the loan agreement, the personal guarantee will never come into play.

 

Is the owner’s spouse required to sign in some cases? Most small- and medium-sized business owners co-mingle their personal finances with the business, so if that’s the case the spouse will also be required to sign a personal guarantee.

 

Are all small- and medium-sized businesses required to sign a personal guarantee? No, some are exempt: those with annual revenues of at least $25 million, companies registered on a public stock exchange, non-profits, venture-backed companies and companies with an ESOP (employee stock ownership plan) structure.

 

What if you sell the business? You may be required to pay off the loan as part of the sales process. If that’s the case the issue of the personal guarantee is moot. If the new owner will be taking over loan payments as part of the sale, be sure you get your personal guarantee released—or you can still be held liable if the loan goes into default even if you have nothing to do with the business anymore.

 

As with all other business transactions, be sure you completely understand what you are signing when you are asked for a personal guarantee.

 

Contact Clear Skies Capital today at 800-230-9822 to discuss funding options for your small- or medium-sized business—and learn whether a personal guarantee will be required to be approved.