Personal Guarantees In Maryland Business

When you sign a personal guarantee for your business loan, you’re promising to repay the debt with your own money if the company can’t. This applies to your house, savings, and other personal assets. The protection you thought you had by forming an LLC or corporation disappears the moment you add your signature to that guarantee. Most business owners don’t realize they’re waiving their limited liability protection. You created a business entity specifically to keep your personal finances separate from company debts. A personal guarantee erases that boundary.

When Lenders Demand Personal Guarantees

Banks and commercial lenders almost always require personal guarantees for small business loans. If your company has limited assets, a short operating history, or inconsistent cash flow, you can expect this requirement. Lenders want assurance they’ll recover their money even if your business fails. Common situations where you’ll face personal guarantee requirements include:

• Commercial real estate loans for business property
• Equipment financing and leasing agreements
• Business lines of credit from traditional banks
• SBA loans for startups and small businesses
• Commercial lease agreements with landlords

The stronger your business financials, the more negotiating power you have. Established companies with solid revenue sometimes convince lenders to accept limited guarantees or eliminate them.

Types Of Personal Guarantees

Not all personal guarantees work the same way. An unlimited guarantee puts everything you own at risk with no cap on liability. If your business owes $500,000 and folds, the lender can pursue your personal assets for the full amount plus interest and legal fees. A limited guarantee caps your personal exposure at a specific dollar amount. You might guarantee $100,000 of a $300,000 loan, limiting your risk while still giving the lender some protection. Several owners can split guarantee obligations. If three partners each sign for one-third of the debt, they share the liability instead of each being responsible for the entire amount. This approach works when lenders accept several guarantees instead of joint and several liability.

Protecting Yourself Before You Sign

Read every word before signing any guarantee. Some contain provisions that let lenders change loan terms, increase interest rates, or extend repayment periods without your consent while keeping you on the hook. A Maryland business lawyer can identify these dangerous clauses before you commit. Negotiate the scope whenever possible. Ask for a limited guarantee instead of unlimited liability. Request a sunset provision that releases you from the guarantee after the business meets certain financial benchmarks or operates successfully for a set period. Keep business and personal finances completely separate. Maintain distinct bank accounts, credit cards, and accounting records. This separation strengthens your position if you ever need to challenge a lender’s attempt to collect on the guarantee.

What Happens If Your Business Defaults

Lenders typically exhaust business assets before pursuing personal guarantees, but they’re not required to do so in Maryland. Some move directly against personal assets, especially when business assets won’t cover the debt. You’ll receive a formal demand for payment. Ignoring this notice doesn’t make the problem disappear. The lender can sue you personally, obtain a judgment, and place liens on your property or garnish your wages. Bankruptcy might discharge personal guarantee obligations, but it depends on the type of bankruptcy and specific circumstances. Chapter 7 bankruptcy can eliminate guaranteed liability, while Chapter 13 involves repayment plans. These decisions carry serious consequences that affect your financial future, but working with a Maryland business lawyer helps prevent these decisions from ever having to be made in the first place.

Getting Legal Help With Guarantees

The attorneys at Brown Kiely LLP review guarantee agreements and negotiate better terms with lenders. We’ve helped Maryland business owners limit their exposure and understand exactly what they’re signing. Whether you’re considering a personal guarantee for the first time or dealing with collection efforts on an existing guarantee, we can explain your options and help you make informed decisions about your business and personal financial security.