Your landlord or a supplier can ask for your personal guarantee, which is common business practice.
If the business becomes unable to pay the debt, the personal guarantor will be called upon to repay
what’s outstanding. In small businesses, the guarantor is usually the owner, which means your
house, your personal bank account, and your savings could be on the line.
“One of the simplest ways to protect yourself is to carefully read every contract presented to you.
You should know exactly what your obligations are before you sign it and sometimes, you’ll have to
negotiate the terms,” says Paula Lines from The Law Shop.
“We recently agreed to advertise in a local newspaper, and we were asked to apply for a credit
account with them. The fine print specified that the directors were providing a personal guarantee.
In some situations, giving a personal guarantee is unavoidable. But it made more sense to pay for
our advertising in advance than binding our three directors to a potentially everlasting personal
guarantee,” Paula explains.
There are several things to consider as a business owner if you are being asked for a personal
guarantee. If you’re taking out a loan or a lease agreement, you can ask the terms of your personal
guarantee to be terminated or reassessed as soon as the debt is repaid, or when the current lease is
up. If you’re dealing with suppliers, discuss limiting the timeframe of your personal guarantee to two
or three years, as you can prove your reliability and creditworthiness within that time.
“If you have proven that you’re a reliable debtor, your supplier won’t need that personal guarantee
years later. This also applies when you’ve given a personal guarantee to the bank when securing
finance for your start-up or expansion. Do they still need it over time? Even banks can release them,
but they generally won’t do it unless they are asked. It never hurts to ask,” Paula says.
In some circumstances, you can put your home and large personal assets into a family trust to
protect them from most claims. Feel free to contact Paula and her team at Law Shop on 0800 LAW
SHOP (0800 529 7467) and have a discussion with a business law expert to find out what is right for
you. The Law Shop provides legal advice to businesses owners every day, and they can help with
leases, buy and sell agreements, trusts, business finance, contracts, and more.
“If you’re new in business or expanding, book in a meeting with us either in Tauranga or Rotorua to
make sure that you’ve thought of everything on the legal side. In most cases, we can quickly assess
what you need to suitably protect your business as well as your personal assets.”