held liable for any past , present and future obligations owed by the company . The debt may be paid by the company at a given date , but you will still be liable for any subsequent indebtedness by the company .
When should you sign a personal guarantee to secure financing ?
You have applied for a loan and you are being told that you may require an additional guarantee or security to qualify for the same and you are wondering why it is required . Let us now look at why is it so .
Why do lessors and lenders require a personal guarantee ? Many lenders require a personal guarantee as an “ added assurance ” that the owner or executive is committed to the business and is committed to repaying the equipment lease or loan . A personal guarantee demonstrates to a lessor or lender that you are a responsible business owner and intend to repay all of your business leases and or loans .
Why is the spouse required to sign in some cases ? For the same reason a business owner is . Since in most cases an SME business owner ’ s personal finances are co-mingled with the business , so are the spouse ’ s finances .
Are all small or medium-sized businesses required to sign a personal guarantee ? Not all SMEs are required to sign . There could be exceptions where the lender may find it necessary to do so .
When you should not sign a personal guarantee
Perhaps you may ask yourself is personal guarantee really necessary and must one sign for it ? We will try to explain why you shouldn ’ t : Be careful about signing a personal guarantee if you are not part of the executive management team and do not really have a full view of the company ’ s plans or finances . If you are unsure , consider having your lawyer review the document .
What does a personal guarantee include ? The personal guarantee will declare that you are personally liable for the lease or loan obligations of your business and may also declare that you are liable for default interest , legal and other fees .
What if you sell the business ? In the event you sell your interest in a business , you need to make sure you get your personal guarantee released . If you are not properly released from the personal guarantee you will still be held liable if the lease or loan goes into default . You may be required to pay off the lease as part of the sale of the business .
Do I need a personal guarantee for a business loan ? Yes ! A personal guarantee is almost always necessary for a business loan , especially for startup loans . It is simply an agreement you sign agreeing to pay back the loan personally if the business cannot pay . It is like you are the co-signer on the loan . This agreement is binding even if your business is not connected to you personally , like a corporation or limited liability company ( LLC ). If the company fails , for example , and cannot pay its bills , your personal guarantee can be activated by the lender .
Even if you don ’ t use an SME loan guarantee , most bankers will still require you to have a personal guarantee for your start-up loan . The bank wants you to have a financial stake in the success of the business and they want you to understand you can ’ t just walk away from the business if it fails and leave the bank holding the bag .
Remember this clearly , do not expect to hide behind a business structure when it comes to paying off your bank loan , if you have signed that personal guarantee .
Wasilwa Miriongi is a certified Credit Professional currently working as the Managing Director , Del Creder Credit Management Limited . You can engage him on this or related matters via email at : WMiriongi @ gmail . com .
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