Small businesses make a huge contribution to the U.S. economy. Nevertheless, starting a new business is risky. Lenders view loans to small businesses, particularly start-ups, as among the riskiest they make, particularly when there is little or no credit history or business revenue on which to base their decision. In an effort to lessen their risk, lenders frequently require small business owners to sign personal guarantees as a condition for giving the loan. A personal guarantee is a legal commitment by a business owner to repay a business debt if the business is unable to repay it. These guarantees put the personal assets of small business owners on the line—savings accounts, cars, homes, and retirement funds. However, there are several steps you can take to minimize your liability.
Note: Establishing a business structure providing limited liability, for example, an LLC, will not protect you from liability under a personal guarantee.
Lenders are likely to include terms in small business loans providing extensive personal liability. It is essential to seek legal counsel to explain the full ramifications of a personal guarantee before you sign on the dotted line. We can help you negotiate terms that will minimize your liability and maximize protections for your assets (and your credit rating). Call us today to set up a meeting.