As a business owner, signing a personal guaranty can threaten the liability protection you have attained through incorporation or establishing a limited liability corporation. A personal guaranty is a promise in writing by a business owner that guarantees payment if the business fails to pay. The guaranty functions as a commitment to the lender that the business owner is obliged to repay the loan and the owner intends to continue operating the business. Since the guaranty is not secured by any particular asset, the creditor can seize the guarantor’s personal property if the debt is unpaid.
The execution of a personal guaranty may be vital to a counterparty in a variety of transactions, such as a loan or a contract to supply material or services. However, a personal guaranty can present significant risks for the guarantor/ business owner. If a party insists on having a personal guaranty in place, what can you do to minimize your exposure to liability?
The guarantor can negotiate the terms of the guaranty in order to limit the amount of liability exposure he has assumed. Some guaranties are restricted to a specified period of time. This is particularly useful for start-up ventures that may be able to terminate the guaranty after the business experiences several successful years of financial growth or profitability.
Similarly, the guarantor may be able to limit the debts that are covered by the guaranty. For example, many agreements require the guarantor to guaranty all extensions and modifications with respect to obligations to the creditor. The creditor may also request joint and several liability among multiple guarantors. The guarantor can limit his liability by negotiating with the creditor to limit the guaranty to a discrete contract, and to consent to a guaranty that covers only a portion of the debt rather than the full amount when other guarantors are involved.
The guarantor may additionally request the inclusion of a termination provision. In the context of a guaranty, the clause would cap the amount guarantied as of a certain date to protect a guarantor with co-guarantors in the event such parties exit the business before the debt is satisfied.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.