Overview of Avoiding Corporate Guarantees
Small business owners, who guarantee their corporate obligations, reduce
the corporation's usefulness as a liability insulator.
Most major corporate debts — particularly bank loans — require
the small business owner's personal guarantee. However, you can usually
sidestep guarantees demanded by other creditors (as well as escape liability
on existing guarantees) with common sense and a tougher attitude. Avoid
suppliers who demand your personal guarantee. Find prospective suppliers
who will give your corporation some credit without your personal guarantee.
If one supplier demands your guarantee, find a more lenient supplier.
However, understand creditor's concerns. Reduce their risk. Convince
a creditor to forego your guarantee. A supplier who refuses to extend
your corporation a $20,000 credit line without your personal guarantee
may risk $10,000. Or will the supplier accept alternative collateral or
lien on the businesses assets to forego your personal guarantee? Or will
a guarantee from an affiliated corporation be an acceptable substitute?
If you must sign a personal guarantee, negotiate for a partial guarantee.
This limits your exposure. Have your creditor cancel your guarantee once
your business establishes a good track record for prompt payment.
Never guarantee existing debts. You gain nothing. Once a business falters,
creditors plead, promise, threaten and cajole for the owner's personal
guarantee. But why risk your personal assets to secure an already shaky
corporate obligation? And don't assume that your business will pay
its obligations. Companies in deep trouble seldom fully pay their debts.
Have your partners sign whatever guarantees you sign. If your partners
are less wealthy than you, the creditor will chase you for payment. Creditors
chase the deepest pockets. If you have already signed personal guarantees,
your goal is to extricate yourself from these obligations. Verify which
obligations you guaranteed. Business people do not always know which debts
they guaranteed. The guarantee may have been in an order form or credit
application. Ask every creditor whether you personally guaranteed their
debt and request copies.
Then terminate outstanding guarantees. You can revoke guarantees for future
credit, and should revoke your guarantee to avoid further liability. And
don't forget to cancel your outstanding guarantees for future purchases
when you sell your business.
If your business is in financial trouble, float the business for as long
as possible to pay the personally guaranteed debts before your company
fails. Or secure your guaranteed creditors with a mortgage on the business.
Your guaranteed creditors will be paid from the business' liquidation
ahead of the non-guaranteed creditors. You reduce the odds that you will
be forced to pay these debts from your own pocket.
Your final objective: Negotiate releases on any outstanding guarantees.
You need bargaining power. For example, a creditor owed money may accept
returned merchandise, partial cash or a mortgage on business assets in
exchange for canceling your personal guarantee. Do you owe your bank?
Will they cancel your guarantee if you agree to help the bank recover
more than they could on their own when they liquidate your business? Secured
lenders need the business owner's cooperation to maximize their recovery.
Bargain your cooperation for those concessions that reduce or eliminate
your personal exposure.
Not all creditors or lenders who hold your guarantee will release your
guarantee for your cooperation. This same creditor may respond to less
friendly overtures. Chapter 11 may forestall foreclosure and wouldn't
be to your creditor's advantage. You have bargaining chips to coax
creditors to cancel guarantees.
If you personally guaranteed a corporate debt, do the paperwork to indemnify
and reimburse yourself from your corporation. Your corporation can give
you an indemnification and a security interest on its assets. You then
have a priority claim and will be reimbursed from the corporate assets
ahead of its unsecured creditors.
YES, YOU CAN LOSE EVERYTHING!
You may think that your wealth is safe and that you don't need protection.
But don't delude yourself and accept reality — for every 60
minutes you spend making money, spend 60 seconds thinking about how to