As many entrepreneurs and small business owners know, banks, landlords and investors will often require a personal guarantee. A personal guarantee allows the lender to reach your personal assets to satisfy a debt in the event the business is not able to pay. While many lenders will walk away unless you are willing to provide a personal guarantee, it is important to understand that the terms and limits of a personal guarantee are negotiable.
When negotiating a personal guarantee, keep in mind the following terms and tactics:
- Limit the amount of the guarantee itself. Suggest a percentage of the loan or a reasonable dollar amount as a limit on the personal guarantee, or if there are multiple owners, limit each partner’s personal guarantee to a percentage of the total loan.
- Limit the time period of the guarantee. If the loan is for 5 years, negotiate the removal of the personal guarantee after 3 years, as long as certain milestones are met, such as timely payments.
- Re-negotiate. The relationship and your creditworthiness may progress over time. Leave open the possibility to re-negotiate the personal guarantee in the future to lower the percentage and length of time of the guarantee.
- Carve-outs. Exempt particular assets from the guarantee, such as your home.