Taking calculated steps to protect your money is crucial when offering a business a loan. In addition to asking for collateral, you need to consider other options to protect you if the business defaults on the loan. And one of these options is a personal guarantee.
With a personal guarantee, a business owner or key executive signs an agreement stating they will be personally liable for the loan if the business can’t pay it. Thus, you can go after their personal assets.
Requiring personal guarantees is critical for your business, but here is what to keep in mind:
Determine the best type of personal guarantee for each business
The businesses that approach you for a loan will have unique characteristics that should be considered when requiring a personal guarantee. The first characteristic is the business structure. Sole proprietorships, limited liability companies (LLCs) and C or S corporations operate differently, offering different levels of protection. You need to understand how each works to know how you can implement a personal guarantee in each case.
The number of owners and the degree of risk you associate with a loan are other qualities to consider when requiring a personal guarantee from a business.
The primary types of personal guarantees are limited and unlimited. With the limited option, you can only collect a specified amount of money or a percentage of the outstanding balance from the guarantors. It’s a suitable option when multiple people are responsible for a loan, as you can collect the agreed percentage from each guarantor.
An unlimited personal guarantee requires the guarantor to pay the full outstanding balance. You can use this option for new businesses or those with limited credit history.
A personal guarantee provides an extra layer of security for lenders. Learn more about enforcing it while observing Florida laws to maximize its benefits.
