When we first sign personal guaranties most of us have no clue how dangerous the contracts are. The lender or creditor tells us that everybody signs them. So does our accountant. And our attorney. Or that they are normal. Neither of these is true.
But when the lender says “sign or leave” guess what most of us do?
By the time we find out what a personal guaranty contract is it’s too late for any repair.
To be clear, this personal guaranty contract is a worldwide standard. In some countries it’s called a personal suretyship. In others a commercial guarantee. But they all mean the same thing.
Since 1992 I’ve worked with hundreds of distressed business owners. Losing their homes because they signed a personal guaranty at some point. Most marriages don’t survive the stress.
In my work the personal guaranty it is always a business owner guaranteeing a company debt. Or, much worse, their parents guaranteeing that debt.The contract protects the lender, usually a bank. But in doing so it destroys the business owner.
That same bank often secures the business loan with personal security. In other words, they expect you to deposit cash with them. Or to allow them to take a “charge” or a covering “bond” against your home. As well as the personal guaranty.
I learned the scope of these contracts documents back in 1992. My local economy collapsed and took my firm with. I too had secured the business loan with personal assets. And when the bank needed payment they liquidated the assets for 10% of the true worth.
I could not understand how I could have been so stupid. I began to talk to other business owners, only find that every single one of us had signed these same contracts.
I wondered how banks could get away with holding cash and other securities against a loan. As well as provoke us into signing a personal guarantee to secure them.
I have no problem with them protecting themselves.
- I have a problem with the unknowing guarantor losing their home and everything else they own.
- I have a problem with parents signing these personal suretyships without knowing what they are.
- I have a problem with spouses signing personal guaranties without understanding them.
- I have a problem with one spouse being able to sign a personal guarantee of these without the consent of the other.
It’s tough enough to close a business. How much tougher when your family point fingers at you because mum and dad are losing their home because they signed that guaranty?
After 25 years of helping people through the fallout I have placed everything I know online in a course I call Business Owner Success Strategies. The course focuses on the challenges of ownership, rather than regular business challenges addressed whenever we talk about entrepreneurial risk.