Posted By Don Monteith on August 16, 2008

No Personal Guarantees….Your Best Deal!!

Things you may not expect USUALLY HAPPEN! Here’s what happened to a good friend of mine several years ago. Timing doesn’t matter, it could happen TODAY.

My friend went out of town on vacation. Upon his return, he discovered that his “PARTNERS” had signed a MAJOR contract to PURCHASE an expensive computer system WITHOUT even consulting with him.

This is why your AGREEMENTS are so IMPORTANT and MUST be in WRITING! My point is…this can happen to you unless your LEGAL advisor has PROTECTED your best interest in the business. You DO NOT want someone making decisions for you when it is YOUR money at RISK. Even more serious is being on the hook for any borrowed funds from your banker.

Small business owners usually sign PERSONAL guarantees with their banker, which means everything YOU own backs up the company debt. Your % ownership is NOT CONSIDERED unless your legal counsel has protected YOU!

It is a MAJOR decision on your part, just as it has been in my case, to be involved with diverse ownership of your business. You could own 8%, 10% of the firm, however, if YOU sign personal guarantees for the debt of the company then you are backing up 100% of the debt, not just the 8% or 10% based on your ownership.

This is very important for you to understand in your business dealings. Do not THINK these personal guarantees don’t hold “water”. Heaven forbid, but IF your business fails and you (your company) owe the bank money, YOUR FRIENDLY BANKER changes his/her personality.

He now becomes your friendly COLLECTOR and demands full payment (immediately!). It is an amazing sight to see. But, you will not be a happy camper with this new person you are about to find on your doorstep.

Keep in mind, the bank will go after the most LIQUID ASSETS owned by you and/or the other partners. Or the easiest property to sell and convert to CASH. It makes no difference to the banker (now collector) who the fortunate one is to cough up the assets or cash from PERSONAL assets.

The bank expects to be PAID. The bank has ONE concern. Protecting their client’s (customer’s) money. You are facing tough times, yet you agreed to hold them harmless by backing up your loan with personal assets.

With good legal advice, you may be able to limit your liability to the % of stock owned rather than to the whole amount owed. You must put this in place as part of your agreement with the bank at the beginning, not after things go sour.

Obviously, NO PERSONAL GUARANTEES is the best deal of all for YOU! Seek your funds from different sources and try to find a bank that will NOT require a personal endorsement. You have served your firm well when you accomplish this goal.

BUSINESS TIP: Let your legal advisor guide you in everything you do; every paper you sign; every decision you make in business. PROTECT the INTEREST of YOUR LOVED ONES!! Do not think, NOTHING can go wrong!! Hire the VERY BEST COUNSEL. OWN 51% of the Stock in your company. THINK long and hard BEFORE accepting any less. Consider all the options available to you

Categories: Business Tips
Tags: Business, Business Tips