Many Kentucky business owners sign personal guarantees without fully understanding what that commitment covers and, in some cases, without even realizing they are signing one. When the business hits financial trouble, creditors may be able to pursue the owner personally for debts the business cannot pay.
Understanding personal guarantees
A personal guarantee is a legal promise to repay a business debt with your own money. Lenders, including merchant cash advance lenders, often require this before approving small business loans. Most business credit cards also include a personal guarantee by the signer. It gives creditors extra security, but it also puts your personal assets at risk.
How personal guarantees create risk
When a business cannot meet its loan obligations, the lender has the legal right to collect directly from you. This can mean wage garnishment, bank account garnishments, and even a lien on your home. These effects can last long after the business has closed.
Ways to limit your personal exposure
- Request a limited guarantee before signing. This limits how much of the loan you are personally responsible for, rather than leaving your full personal wealth at risk.
- When a business reorganizes, creditors can still pursue your personal assets directly. Make sure any reorganization also addresses your personal guarantee and exposure.
- When a business closes, owners with personal guarantees often explore a personal bankruptcy filing to address the guarantee.
Taking steps to limit the risks of personal guarantees
Personal guarantees are serious financial commitments that extend beyond the life of a business. Understanding your current exposure and taking steps to limit future liability can help you protect your personal finances.