Business Loans and Personal Guarantees – Don’t leave the company yet!

November 17, 2010

Smart banks ask their business customers for a personal guarantee before they give a loan to a business.  It makes good business sense for banks to do so–even if the business fails, the owners have agreed to cover the debt out of their own pocket.  Nowadays, you probably won’t find many banks offering small businesses loans without a personal guarantee of some sort.

This can pose risks to the business owner, however.  If the business fails, your personal assets could be at risk.

It’s even riskier if you have left the business for which you guaranteed the loan in the first place.  Small business owners sometimes disagree with one another and agree to go their separate ways.  The bank, however, won’t care that you’ve left the business if your former company decides to default on its loan obligations.

Before you make it official and withdraw from the ownership of a company, consider the loan obligations and whether you’ve made any personal guarantees.  If you have, don’t withdraw until you’ve made sure that you are no longer legally obligated to pay for the company’s debts.  That may mean the business has to negotiate your removal with the bank or refinance its loan without you as a guarantor.  But you should insist your business partners make that happen, because otherwise you’ll be in the tough position of being liable for a debt over which you have no other control.

Think about it.  If you withdraw from governance of the company, you can no longer negotiate a sale of the assets if the company suddenly runs out of funds.  Instead, you’ll be stuck guaranteeing a loan for a company that doesn’t care for your opinion anymore on whether it should continue to pay its obligation.

Before you withdraw from ownership, membership, or governance of a small business with debt obligations, consider consulting a lawyer to advise you on the possible ramifications of your withdrawal.

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