What’s a Personal Guarantee (and How To Avoid It)

Want to build strong business credit without putting your personal finances on the line? I got you. 😉

Many entrepreneurs face the hurdle of personal guarantees when seeking credit for their business ventures. But what exactly are they, and can you avoid them? Let's talk about it.

What's a Personal Guarantee?

Think of a personal guarantee as a double-edged sword. It assures lenders you'll be personally responsible for repaying any business debt if the company falls short. This might seem reassuring to lenders, but for you, it means your house, car, or other valuables could be at stake if things go south. 😢

This concern is real, and it's understandable why any business owner would want to avoid losing it all to fund their business.

So, How Do You Avoid Them?

Here are a few ways to navigate the world of business credit without a personal guarantee:

1. Build Business Credit History

The great news is that building business credit is easy and similar to the process of building personal credit. Start with business credit accounts designed specifically for businesses with no personal guarantee requirement. This includes a net 30 vendors, retail, gas and fleet, and even some major credit cards. This will create a separate credit profile for your company.

2. Explore Alternative Financing

There are several options for financing your business without using a personal guarantee. Some popular ways are merchant cash advances, invoice factoring, or equipment financing, which rely on the value of your invoices or equipment, not your personal creditworthiness. Here's a deeper dive:

Invoice Factoring

Imagine having access to cash upfront for the invoices you've issued but haven't yet been paid on. Invoice factoring allows you to do just that. Here's how it works: you sell your outstanding invoices to a factoring company at a discount. They then take on the responsibility of collecting payment from your customers. You receive a percentage of the invoice value upfront (typically 70-90%), with the remaining amount coming after the factor collects from your customer. This is a great option for businesses with slow-paying customers, as it helps improve cash flow without a personal guarantee.

Equipment Financing 

Need that fancy new piece of machinery but don't have the funds upfront? Equipment financing allows you to spread the cost of equipment over a set period. The equipment acts as collateral for the loan, so no personal guarantee is needed. You make payments towards the equipment, and once the loan is paid off, you own the equipment outright.

Merchant Cash Advances (MCAs) 

MCAs provide a quick influx of cash based on a percentage of your future sales. Instead of a traditional loan structure with fixed interest rates, MCAs typically come with a "factor rate" that's a percentage of each future sale you make until the advance is repaid. This can be a good option for businesses experiencing rapid growth or needing immediate access to funds, but it's crucial to understand the terms and potential costs involved, as MCAs can be expensive compared to other options.

3. Negotiate with Confidence

If a personal guarantee seems unavoidable, try negotiating a limited liability clause, capping your potential risk. It limits the amount of money a party can be held responsible for if something goes wrong.

In the context of a personal guarantee, a limited liability clause would cap the maximum amount you, as the guarantor, would have to pay if the business defaults on the loan.

For instance, imagine a scenario where you agree to a personal guarantee with a $10,000 limit. If the business fails with a $50,000 balance, you'd only be liable for the capped amount of $10,000 according to the limited liability clause.

Note: The enforceability of these clauses can vary depending on the specific circumstances and local laws. It's always wise to consult with a legal professional before signing any contract with a personal guarantee clause.

Exploring the Best Fit

Each alternative financing option has its own advantages and considerations. The best choice for your business will depend on your specific needs, creditworthiness, and risk tolerance. Consider factors like the amount of capital needed, repayment terms, and associated fees when making your decision.

By understanding these alternatives, you can unlock the doors to financing your business without putting your personal assets on the line. 

Join the Flyy Credit University to gain help navigating the complexities of business credit, alternative financing, and choosing the right option for your unique situation.