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Don't Ever Sign a Personal Guaranty!

Don't Ever Sign a Personal Guaranty!
Pat Dickson - Sat Nov 03, 2012 @ 03:54PM
Comments: 0

Should you ever sign a
Personal Guaranty? No!

One of the most common mistakes business owners, officers, managers and employees make is that of signing a personal guaranty. Don't do it. It seems innocuous, but it isn't.

The personal guaranty is part of a very common scenario. You are trying to set up terms with a vendor so you can order product or materials.

As a matter of course, the vendor emails you a form to fill out, sign, and email back to him. Only then can he can fulfill the order and accept being paid at a later time, likely on somewhere between net 7 and net 120 day terms, depending on the nature of your business.

Beware, somewhere in the vendor's paperwork is a personal guaranty!
Don't sign it!

However, first you have to look through the vendor's paperwork to find the personal guaranty section. In many cases, this paperwork will be titled something like Credit Application, and then there will be one to several pages you have to fill out about your company, e.g. the official corporate name, the address of your headquarters, your revenue numbers, headcount, the current availability on your credit line, your Dun and Bradstreet Number, inter alia. You might even have to attach your company's pro forma financial statements for the last quarter, and the audited financial statements for the previous year.

don't ever sign a personal guarantyAt the end of all of these disclosures you will likely find a place where a company owner, officer or employee has to sign and date the application itself, not the Personal Guaranty which usually comes later in the form, or as a separate attachment. By signing the Credit Application, on behalf of the company, you, a company agent or employee, is promising that the company will pay for whatever you are going to be ordering at some agreed time in the future. Signing this part is fine (The Credit Application, not the Personal Guaranty!).

To say it again, by signing the Credit Application, you, or an owner, officer, or coworker is acting on behalf of the company. The company becomes obligated for the debt, or the credit for which the application is being submitted. The person signing is not thereby becoming personally obligated to pay for any debt incurred. The company is obligated, and the credit line received belongs to the company and becomes its full responsibility. This is even the case if an owner of a corporation or LLC is signing the Credit Application. The debt belongs to the business entity, not the shareholder or member, at least not beyond their capital contributions.

Only if a person signs the Personal Guaranty section could he, the person, be on the hook for any debt incurred or credit extended, which is why this article is emphasizing that signing the Credit Application part of a Credit Application, as an owner, manager, or agent of a company is fine. However, signing the Personal Guaranty part of a Credit Application is a big NO NO! You as an individual do not want to be responsible for an entire company's credit line with even a single vendor, even if you are an owner! As an owner, if you are a shareholder or LLC member, you formed your company with a primary goal in mind, and that was to limit your personal liability!

In other words, if your company runs out of money and can't pay for the materials or product procured under the subject Credit Application, and a lawsuit results, you don't want to be personally named in the lawsuit. I suppose that is the big take away from this article. If you are an individual and you sign a Personal Guaranty on behalf of a company, you can be sued for any debts you personally guaranty, and the money comes out of your pocket!

Look closely - the sneaky
Personal Guaranty is in there somewhere!

Ok. Keep looking for the Personal Guaranty section. Make sure no one, especially you, signs the Credit Application as anything but an agent, officer, director, or authorized employee of your company, which as stated above, is usually part of the Credit Application itself. The Personal Guaranty, as also previously stated, is usually at the end of the document and titled "Personal Guaranty," or it may even be a separate attachment to the application. If you cannot find either, read every word of the application to make sure there is no language in it, whatsoever, which suggests that any individual signing anywhere is thereby made personally responsible for any debt or obligation incurred.

What do you do when you find the Personal Guaranty?
Destroy it. Cross it out!

If the Personal Guaranty is a separate attachment, cross it out with a big X. If the Personal Guaranty is a section at the end of the Credit Application, cross it out, every line! If there is Personal Guaranty language in the Credit Application lurking sneakily in the text, cross it out, but down by the Credit Application signature line, preferably right above it, write something like:

"Notwithstanding any other term in this document herein, no personal guaranty is being given by anyone executing this document."

Of course, always consult an attorney before inserting your own changes/additions into any legal document. Yet hopefully this article is instructive in the case you simply can't afford to pay a lawyer every time you deal with one of the many credit applications that come across your desk each week.

Caveat, sometimes you just have to sign a personal guaranty

Just make sure an owner of the company, not you, unless you are an owner, member, or shareholder, signs personally. In cases there is no other option but to have a vested member, shareholder, or owner of a company sign a Personal Guaranty. Why? In most such cases, the company itself isn't credit worthy, so no risk averse vendor is going to give the company terms unless an individual, with assets outside the company, guarantees the debt for any credit extended.

So we see, from a vendor perspective, a Personal Guaranty is an important tool when dealing with companies that present unacceptable financial risk. Just make sure that if you are not a vested owner (and clearly aware of the ramifications of what you are doing and personally risking to give such risk averse vendors separate financial assurances) don't ever sign a Personal Guaranty!

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