Many might see the personal guarantee as a rather old-fashioned type of promise, often required of newer business owners applying for a loan. It is however, a way that banks and other lenders can sidestep the protection of a more modern business setups, and especially the limited liability corporation. LLCs have risen to great popularity since the 90s, allowing for business owners to experience many of the perks of a corporation while enjoying the benefits of the pass-through entity, taking profits directly. An LLC is easily set up, and once established, members are protected personally from debts and possible judgments or lawsuits affecting the company.
Obviously, banks understand how this level of protection works, so they may ask for extra collateral in the form of the personal guarantee, meaning that yes, they can come after you if your business forfeits on a loan. A recent Inc. news article points out that banks and other entities are beginning to ask for such promises even more lately, with the Small Business Administration even requiring all loans to be guaranteed by any members of a corporation who hold a stake of twenty percent or more.
“More and more banks are expecting entrepreneurs to make the guarantee, and that can be a risky, risky thing for an entrepreneur to do,” says Dan Short, a professor of accounting at the Neeley School of Business at Texas Christian University. “But working with your bank, it can be done right.”
Still, many business owners chafe under the thumb of the lender with such a guarantee, and often begin wondering how to have it released most expediently. The easiest way to have the personal guarantee released is to pay off the loan. If it is one of significant size, obviously that is not always realistic for the immediate future. And while you can see the personal guarantee dismissed in Chapter 7 or Chapter 13 bankruptcy, that route is usually a last option.
The personal guarantee may be paid off also when you sell your company, if you pay off the loan with proceeds from the sale or have the business loan refinanced; otherwise, the bank may be extremely reluctant to release the guarantee—meaning that you then become liable if the new owner defaults. Whether you want the guarantee released while you still own the business or are in the process of selling it, consult with an experienced business attorney like Shane Coons who can help you negotiate a way out with the bank.
Whether you are selling the business or not, if you are truly serious about being released from the guarantee, your best bet is to work with your business attorney in creating a business plan to show to the bank and convince them why a personal guarantee is no longer needed. Include financial statements, projections for the future, and a discussion of how strengths and weaknesses will be handled. You may also want to offer another form of collateral for release from the guarantee.
Do you have questions about a personal guarantee or another business matter? If so, contact Attorney Shane Coons. Our law office represents clients involved in a wide range of businesses and legal issues, and we would be glad to review your case and help you explore your options.
Call now at 949-333-0900 or email us at Shane.Coons@seclawoffices.com