The recent economic downturn and global crisis left many small business owners in Pennsylvania and across the country struggling to stay afloat. You may be among those whose new or burgeoning businesses suddenly fell on hard times. Like many, you sought creative ways to keep your business up and running, and this may have included seeking additional funds from a financial institution. However, if your business had no credit history or few assets, the lender likely required your personal guarantee before agreeing to the business loan.
A personal guarantee may have seemed like the only option to obtain the money you needed to keep your business running. Perhaps you were hoping the crisis would pass quickly so you could repay the loan and continue to grow your business. However, if your business continues to struggle month after month, you may be regretting signing a personal guarantee for that business loan.
The disadvantages of a personal guarantee
Financial institutions often ask for the added security of a personal guarantee for small business loans. Your signature on the document means that your lender has the right to claim your personal assets as payment if you should default on the loan. This may include your home or other real estate, your cash, any of your personal investments, and other assets. In fact, some personal guarantee documents ask you to list specific assets that are on the line if you cannot repay the loan.
In addition, a personal guarantee may place your credit score at risk, not only for your business but also for you personally. Since the business loan becomes attached to your personal finances through your guarantee, the lender may report any delinquencies to the credit agencies. Even if you went to the trouble of establishing a limited liability corporation precisely to avoid these issues, agreeing to give your personal guarantee likely jeopardizes those protections.
Legal ramifications and your options
Your personal guarantee may have made it easier for you to obtain the business loan you needed, but now it is likely the source of tremendous financial burdens for you and your family. You may have much at stake, including your home, your job and your options for the future. While you might feel overwhelmed at these prospects, you should know that there are several options available for debt relief, whether it involves your business or your personal affairs.
For example, Chapter 7 or Chapter 13 bankruptcy is available to provide immediate relief to those who are struggling with overwhelming debt. Many small business owners have found peace of mind and a clean slate that allows them to focus on moving toward a brighter, debt-free future.