The Personal Guarantee of a Business Owner
Hypothetical: Jordan owns Jordan’s Delights, Inc. She has been in business for 5 successful years. However, after thinking about her options, Jordan decides she wants to expand her business. She believes that the expansion of the business is a wise financial decision. Jordan’s Delights, Inc. is approved for an SBA loan, which requires Jordan to sign a personal guarantee. In addition, when Jordan goes to the landlord to request additional space, the landlord agrees to a new lease for the expanded space (with increased rent). The new lease with the expanded space is in Jordan’s name as that is how she has always done it. Six months into the new space, it is clear to Jordan that her decision financially is not going to work out. She is heartbroken that all of her hard work might be unraveled. She decides to seek the advice of a business attorney.
The business attorney explains to Jordan the consequences of signing a personal guarantee. That is, Jordan is personally liable for the SBA loan if Jordan’s Delights, Inc. does not pay back the loan because a personal guarantee makes the owner personally liable for debt that is also a business debt. So, instead of the SBA loan being solely a business debt, by signing the personal guarantee, Jordan is dumbfounded to find out that the debt is both a business debt and her personal debt. When she signed the personal guarantee she did not think anything of it. Not only did she not realize the significance of signing the personal guarantee, it never occurred to her that her business would not continue to grow. To Jordan, it was simple. An expanded business simply means more revenue. However, with an expanded business there is also more costs. Bigger does not always mean better she now realizes.
Jordan is stunned when the business attorney tells her that she is solely personally liable for the lease for her business. Jordan does not understand how she can be personally liable for her business lease when she did not sign a personal guarantee for it. However, the “business lease” is actually in Jordan’s individual name. As a result, the business has no liability for the lease, and all of the liability is solely with Jordan individually. The business attorney explains that in order for the business to be liable, the lease must have been in the business name. Jordan would only be individually liable if she had signed a personal guarantee for the lease that was in the name of her business. Jordan regrets not seeking the advice of an attorney and having the attorney review the documents before she signed them. With hundreds of thousands of dollars in personal debt now on the line, Jordan contemplates her limited options.