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How to Avoid Corporate Guarantees

When a small business owner guarantees a corporate obligation they reduce the corporation's usefulness as a liability insulator.

Most major corporate debts — most notably bank loans and real estate leases — require personal guarantee of the business owner. It is possible to sidestep guarantees demanded by other creditors (as well as escape liability on existing guarantees) using common sense and a tougher attitude in negotiations, or by offering alternative collateral or a lien on certain businesses assets to substitute for a personal guarantee. Or, provide a guarantee from an affiliated corporation as an alternative. In any event, if you must sign a personal guarantee, negotiate for a partial guarantee to limit exposure and agree in advance to have your creditor cancel your guarantee once your business establishes a good track record for prompt payment.

It is essential to never guarantee existing debts. Once a business falters, creditors will often go to major extremes to obtain the owner's personal guarantee on existing debt and you must never assume or anticipate that your business will pay all of its obligations, as companies in deep financial trouble seldom fully pay their all of their debts.

If you must sign a guarantee, make sure that all of your partners sign with you. If any of your partners have a lesser net worth than you, a creditor will always chase you for payment first as they chase the deepest pockets as a first measure of offense. If you have already signed personal guarantees, your goal should be to extricate yourself from these obligations. Ask every creditor whether you personally guaranteed their debt and request copies of the guarantee, even if it is buried in a purchase order, invoice or statement. Then, terminate and revoke the outstanding guarantees and revoke any guarantees for future obligations of the corporation.

PROTECT YOUR ASSETS TODAY!

The best defense is a good offense.