If you’re planning on borrowing money for business purposes or even signing a lease for a commercial property, the bank may ask you to give a personal guarantee. What this means is that you sign a guarantee so that if your business fails to make payments on your debts, the bank can come after your own personal assets to recoup their losses.
If you’re signing a personal guarantee on a lease for commercial premises, the landlord (or lessor) is also able to come after you to make any payments in the event your business can’t.
Your bank manager may tell you that a personal guarantee is a requirement against a business line of credit or a business overdraft. However, they may not always tell you that you can negotiate your terms.
Limit Your Guarantee
A good example of this would be limiting your amount of personal guarantee, to only the amount you reasonably think you can risk out of your personal assets, in the event your business was to go into liquidation.
For example: if you add up the liquidation value of your business plus the amount of personal risk you’re willing to take, you should reach a figure of personal guarantee you’re willing to extend.
If the figures stack up the right way, you may be able to exclude your family home from any guarantee you make on a business loan. Wherever possible, you also want to leave your spouse’s name off that guarantee. This way, if you have any assets that are in your spouse’s name, the bank won’t be able to come after them.
You can do this by asking your bank to limit your guarantee to a specified amount of money, or limit your exposure to only a percentage of the overall business debt balance. If you’re in a partnership or there are multiple owners of the business, you may want to specify the level of exposure for personal guarantees by nominating a percentage ownership amount for every partner. In this case, you may want to nominate ‘joint and several’ guarantees.
Reduce Loan Amount
Of course, if the amount of business equity and the amount of personal assets you want to risk don’t add up to enough to cover the amount you’re guaranteeing, you have the option of borrowing less money. This may require you to rethink your business strategy, especially if you were borrowing to fund a planned expansion, but it will also protect your personal assets at the same time.
Shorter Time Frame
Your bank would love it if you would sign your personal guarantee so it lasts “unconditionally and forever” for the entire term of the loan, but see if you can negotiate a shorter end date. For example, you might ask for your personal guarantee to conclude after a certain percentage of the entire loan term is reached. So if you have a 15 year loan, you could ask that your personal guarantee expire after 4 or 5 years.
There’s also the factor of asking to include terms of relief in your guarantee. When taking out a loan, you can specify in the contract that you want to be relieved of any personal guarantee after a specified percentage of the loan balance has been paid off. This is similar to asking to be relieved from your guarantee after a specified amount of time, but it’s worth negotiating based on the balance value as well.
With all these things in mind, it’s still wise to try and find options that let you get out of giving a personal guarantee at all, if that’s at all possible.