Obtaining financing is a big challenge for any business starting out. Many times, if a business owner has no other source of collateral to secure a loan, banks will require a business owner to sign a guaranty.
What is a guaranty?
A guaranty is a promise to pay a debt. The guarantor is the person making the promise to pay. The guarantor is often the person who needs the loan, but sometimes a third party can promise to repay, as well (i.e., a parent cosigning on their child’s car loan).
Another time when you will likely encounter a personal guaranty is when signing a commercial lease. In this instance, you will be liable for the full amount of the rent, the yearly total, personally. So, if you go out of business, the lease remains a valid enforceable contract. As such, the landlord can come after you personally for the remaining rent.
What are you agreeing to when you sign a guaranty?
When you sign a personal guaranty on behalf of a business, you are agreeing to be personally responsible for repaying that debt in the event your business goes out of business or becomes insolvent. If the bank cannot recover the loan from the business, it will sue you personally. In other words, when you sign a personal guaranty so your business can get a loan, you are putting your personal assets on the line, including your home, the money in your personal; bank accounts, the money in investments, even future wages, which can be garnished. Please note—the protections afforded by becoming an LLC do not override the rights of the bank to collect against you personally.
Are personal guarantees always enforceable?
If you received the loan and the guaranty meets the following criteria, it is generally enforceable: 1. In writing and 2. signed in the guarantor’s personal capacity. This means that the person signing must sign “personally” not as the “president” or “CEO” of the company receiving the loan. This is because the company is its own legal entity, separate from the person who owns the company or runs it.
Can a personal guaranty be revoked later?
It can be, but generally only if both parties agree (in writing) to that arrangement. Additionally, some debts may be discharged in bankruptcy.
Wick Law, LLC is a small business legal practice, representing owners, investors, and entrepreneurs in all aspects of commercial, corporate, and business law, estate planning, contracts and negotiations, business litigation, and real estate. For more information: Contact 614-572-6366, visit www.mwicklaw.com, or email us at firstname.lastname@example.org. Wick Law, LLC is located in Columbus, Ohio.
(Materials in this article have been prepared by Wick Law, LLC for general informational purposes only. This list is for educational purposes and is not to be considered exhaustive. More items could be added to this checklist based upon the type of transaction or industry standards. These materials do not, and are not intended to, constitute legal advice. The information provided is not privileged and does not create an attorney-client relationship with Wick Law, LLC or any of the firm’s lawyers. This checklist is not an offer to represent you. You should not act, or refrain from acting, based upon any information in this checklist. Wick Law, LLC maintains offices in Columbus, Ohio, and has lawyers licensed to practice in Ohio and in the United States District Court, Southern District of Ohio. The firm does not intend to practice law in any jurisdiction where the firm is not licensed.)
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