Like most people, you may be tempted to sign every document handed to you by someone with a friendly voice and the classic refrain, “Oh, this is just standard paperwork.” Please don’t.
As a small business owner, you probably established a little distance between yourself and your business on purpose. No one wants their personal assets at risk for claims made by a disgruntled client, competitor, or vendor. That’s why you went through the trouble to set up the LLC. However, when you sign that “standard” personal guarantee, you throw your good name, your credit, your accounts, and your property on the line if your business defaults.
Unlike a home or auto loan, a business loan is generally unsecured by collateral. Extensions of credit without some sort of security are rare (or very low). Because of this, you may be asked to sign a personal guarantee, for your business. The same may be true for a commercial lease. The landlord may be unwilling to have your corporation (which you just formed this year) as the sole entity responsible for paying rent, so in you swoop to the rescue.
Now, are all personal guarantees so bad? No. Often you’ll need your good credit to help your business establish its own. However, like your twenty-year-old son, new businesses can be unpredictable with cash flow. Make sure you only personally guarantee debt obligations that you can personally afford. Don’t obligate yourself based on your company’s best case scenario. Expect slow months and plan accordingly.
Have questions about “standard paperwork,” or are you and your business currently dealing with this kind of default? We can help with that. Call today. (832) 305-7694.