Most lenders require the individual owner of a Maine-based small business to personally guarantee loans made to their business. This shows the owners’ commitment and helps ensure that the loan obligation is fulfilled.
The problem is that the personal guarantee means personal assets are available as collateral. It opens an individual, or a husband and wife if they both sign, to personal legal exposure.
While it’s difficult to totally avoid giving a guarantee, there may be a few steps you can take to limit exposure:
- If possible, limit the length of the guarantee in time, or the amount that you are personally responsible for. Recover your personal guarantee as soon as the business can cover the debt.
- Limit the amount of the guarantee to a dollar amount or loan percentage.
- Refuse to have your spouse guarantee the loan. Assets held in your spouse’s name, such as bank accounts, would be outside of the guarantee.
- Specifically exclude certain assets from the guarantee, such as a personal residence, certain securities or funds. Consider pledging the cash value of life insurance as an alternative for other collateral. This is an asset you may not miss as much as others while it is tied up as collateral for a loan.
- Another option is to limit the guarantee solely to any deficiency the lender may have after it has exhausted all remedies against the borrower.
So while personal guarantees are usually required, there might be ways the impact can be minimized. Talk with Filler & Associates for more information.