Almost every small to medium size business owner knows about personal guarantees. The most common time is when they approach the bank for funding. Whether the money is to assist with expansion, smooth cash flow or rejig loans, banks look to have the business owners provide personal guarantees.
The personal guarantee is a promise by the business owner to personally repay the company debts in the event of default by the business. Even if the business owner is extremely careful in paying their business clients, unforeseen events can still prevent a business from making a loan payment. When the owner is unable to cover the debts personally, the bank will start to seize personal assets.
Be wary of guaranteeing an obligation for a business you do not own outright. If your stake is 25%, the bank can still go after the whole indebtedness not just 25%. A couple of ways to mitigate this exposure is to get the lender to agree to limit the personal guarantee to your shareholding portion e.g. 25%. In addition have a written agreement with the company and your business partners that everyone will pay their share of the personal guarantee if called upon.
Putting in place insurance will assist in meeting your personal guarantee obligations and remove the onus on you and your family. Bizinsure have assisted business owners with identifying and mitigating their personal guarantee risk.