There are many issues to consider when a lender, service provider, vendor, or other business “partner” talks with you about a guarantee. The following are important to consider when the goal is limiting a person’s personal obligations.
People sometimes sign a guarantee without realizing it. Many times it’s the fine print at the very bottom of the service contract or equipment lease that contains the language that obligates you to a payment that you and your business partners thought was just an obligation of the new LLC you jointly formed. If you sign the contract, you could be obligated for the debt of your company, and to make matters worse, your partners are free from that risk. This is a classic example highlighting the need to read what you sign before you put pen to paper.
Many times a guarantee can be negotiated. There are times when a guarantee is necessary to satisfy another party – your landlord, lender, or your software provider. However, in many instances the amount of the guarantee can be limited, the guarantee can be set to terminate after a prescribed period of time, or possibly a guarantee can be eliminated all together with some discussion.
Usually a guarantee is ‘joint and several’ with the other various guarantors. In most cases a guarantee is an obligation to repay or pay the whole amount owed by the party that is primarily obligated to pay. If you have a guarantee with others and are the last one left standing with cash resources, then your personal assets become the property of the party holding your guarantee. The creditor does not have to settle for one third of the total debt if you were one of three partners that guaranteed the debt. If a guarantee is “joint and several”, each guarantor is usually liable for the whole debt. If you are the one in the deal with the deep pockets you could be the one paying the entire debt.
Carefully review what you sign, negotiate your terms, and make sure you really understand your obligations as you do business.