What Is a Personal Guarantee And Is It a Good Idea to Sign One?

What Is a Personal Guarantee And Is It a Good Idea to Sign One?

“What is a personal guarantee and is it a good idea?” I get asked this question a lot by clients. They want to know exactly what a personal guarantee is. 

We usually see that in business contexts where a business owner goes in to lease a property or to get a small business loan, and they say, “Oh, you just have to sign this personal guarantee.” Most people don’t even really understand exactly what that means, but landlords usually require it. 

Landlords and banks often ask for it

Let’s say the tenant is your business. When you go to rent an office, the landlord says, “You’re a corporation, and a California corporation is how you have your business set up.” Then, they’re going to say, “You need to sign a personal guarantee because your corporation was set up only two years ago and doesn’t really have a lot of assets or a lot of operating history. So, I want to ensure that I’m going to get paid on the lease.” 

So they say, “Just sign this personal guarantee,” and in a lot of lease forms, the personal guarantee is actually built right into the standardized form. And you’re signing on behalf of the corporation and right below it, it’ll say, “I personally guarantee that these payments are going to be made by the corporation.” And then you individually sign that. 

What does it actually mean?

And a lot of times it never comes back to haunt you. But you are basically saying that if anything happens with the business, the corporation files bankruptcy, goes out of business, or you sell the business, you’re still personally liable for those debts. So, if the business can’t pay the lease to your vendors or whoever you have a personal guarantee to, you’re going to be liable to pay that, or you and your spouse will be liable to make those payments. 

What we tell our clients

So, we always tell clients that they should never agree to a personal guarantee. However, the reality of doing business is that when you go to sign a lease or get a business loan, they’re going to require a personal guarantee to make sure that they’re covered. So, in those cases, you really don’t have much of a choice. But if there’s a way you can avoid it then do so. 

And if it’s a vendor or anyone else other than a bank or your landlord, usually you should be able to get out of having to sign a personal guarantee. But it’s always a good idea to avoid them because they really can come back to haunt you five, ten, or even twenty years down the road, and I’ve seen this happen to clients as well.

Contact Us