Avoid Risky Guarantees: Asset Protection Tips for Small Business Owners

When you sign a personal guarantee, it can often kick in immediately if you miss a payment. This could lead to your personal assets being at risk if your business experiences a temporary downturn.

Example: Imagine your business is hit with a slow season, and you can’t make a payment right away. If the personal guarantee kicks in at this point, your assets are at risk. However, if the guarantee is triggered only after a set number of missed payments or if your business’s net worth drops below a specific amount, you have time to recover.

Tip: Negotiate terms that allow the guarantee to only take effect after multiple missed payments or a serious drop in your business’s financial health. This gives you breathing room to stabilize.

As your business grows and improves its financial standing, the need for a large personal guarantee should decrease. Once your business establishes a track record of success and stable cash flow, it’s reasonable to ask the lender to reduce the personal guarantee.

Example: After a couple of years, your business is doing well, and you’ve built strong relationships with your suppliers. At this point, you can negotiate a reduction in the amount you’re personally liable for.

Tip: Keep a close eye on your business’s financial growth and be ready to ask for a reduction in the guarantee when you hit key milestones like higher revenue or better creditworthiness.

Without careful negotiation, lenders can impose an unlimited personal guarantee, meaning one business owner could be held responsible for the entire loan—even if there are other co-owners. This is especially problematic if your co-owners don’t have sufficient personal assets to cover the debt.

Example: If you own 40% of the business but are held personally responsible for the entire loan, you could be at risk of losing everything. Instead, you should negotiate that your personal liability matches your ownership stake.

Tip: If you’re not the sole owner, make sure your liability is tied to your ownership percentage. This prevents you from being responsible for the full loan if your co-owners can’t pay.

Protecting specific personal assets, like your home or retirement accounts, is essential when signing a personal guarantee. Some states offer homestead exemptions that protect primary residences from being seized by creditors, but you need to ask for these protections to be explicitly stated in your loan agreement.

Example: In some states, your home is protected from creditors. If you’re signing a personal guarantee, you can request that your primary residence is excluded from the risk.

Tip: Talk to a legal expert about which assets can be protected based on your state’s laws, and ensure these are excluded from the guarantee.

It may sound strange, but agreeing to a higher interest rate could be an effective way to eliminate the need for a personal guarantee. While this will increase your monthly payments, it might be worth it if it means protecting your personal assets.

Example: If you have the option to pay a higher interest rate in exchange for not signing a personal guarantee, it could be a good deal in the long run, especially if you’re confident in your ability to manage the loan repayments.

Tip: Carefully evaluate whether the higher interest payments are manageable, and weigh them against the protection of your personal assets. If the long-term security is worth it, this could be the best option.