What is a Personal Guaranty? And Should You Sign One?

Hey it's Shaunt, your favorite contracts lawyer.

A personal guarantee is a legal agreement where an individual, often a business owner or key executive, pledges to be personally responsible for a loan or debt if the business itself cannot repay it. This means that the lender can pursue the individual's personal assets, such as their home or savings, to recover the outstanding debt.

More often than not, you've formed a Limited Liability Company (LLC) or Corporation in order to obtain a layer of personal liability protection. A personal guaranty can quickly eradicate this layer of protection by opening up your individual assets if the LLC or Corporation defaults pursuant to the underlying contract.

Why are personal guarantees used?

• Risk mitigation for lenders: Lenders and landlords often require personal guarantees, especially for small businesses or businesses with limited credit history or assets. It reduces the lender's or landlord's risk by providing an additional layer of security.

• Access to financing: Personal guarantees can help businesses, particularly startups and small businesses, secure financing when they might not qualify for traditional loans on their own.

Key points to remember:

• Personal liability: A personal guarantee exposes the individual to significant personal financial risk.

• Impact on credit score: Defaulting on a personal guarantee can severely damage the individual's credit score.

• Legal implications: It's crucial to understand the legal terms and conditions of a personal guarantee before signing.

• Negotiating terms: In some cases, it may be possible to negotiate the terms of a personal guarantee, such as limiting the liability or the duration of the guarantee.

In conclusion,

A personal guarantee can be a valuable tool for businesses seeking financing, but it's essential to weigh the risks and benefits carefully. You should always have your contracts reviewed by a professional, and if you don't have a contracts lawyer on your team yet, the Oozoonian Law Corporation is a perfect teammate.

Shaunt Oozoonian, Esq.

Oozoonian Law Corporation

714-873-9411

shaunt@oozoonianlaw.com