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How to negotiate personal guarantees — without putting your home at risk

If landlords or suppliers ask for your personal guarantee — a common business practice — your house or other personal assets might be on the line. Learn how you can minimise the risks.

Leveraging your home

Home loans are one of the most common ways New Zealand small business owners fund their business.

There are many perks to taking out a second mortgage — including accessible capital for new businesses, low interest rates and flexible repayment options — but also the risk of losing your home if things don’t go according to plan.

But there’s another common business practice that could be putting your house and other personal assets on the line — personal guarantees.

What is a personal guarantee?

Giving a personal guarantee means agreeing to personally cover one or more debts a business takes on. If the business then becomes unable to pay the debt the personal guarantor will be called upon to repay the amount which is outstanding. For small businesses, the guarantor is usually the owner.

Depending on the circumstances, banks and lending institutions might require a guarantor for a business loan.

But banks aren’t the only ones requesting this form of security. It’s now commonplace for landlords and suppliers to ask business owners to give them their personal guarantee.

 “This is risky,” says Wellington-based business coach Steve Hockley. “Most people aren’t aware of what a personal guarantee means.”

Personal guarantees are legally binding, even if you are part of a limited liability company. This means if your business can’t pay its debts, your home and personal assets might be in danger.

Personal guarantees (external link) — Insolvency and Trustee Service

Ways to protect yourself

There are three options businesses should consider when asked for a personal guarantee, says Hockley.

1. Put your home and large personal assets into a family trust

Assets in your family trust can be protected from most claims, but setting one up and managing it can be costly and time-consuming.

Get tips on when and how to set up family trusts (external link) from the Sorted website.

2. Show that the guarantee isn’t necessary

Show the creditor your strong history of trading and creditworthiness. Ask them to take you by your word and your previous actions.

“If a supplier wants to do business, then they should also be exposed to the risks of running a business,” says Hockley.

3. Negotiate the terms

In most cases, this is your best option.

If you’re taking out a loan or a lease agreement, ask that the terms of your personal guarantee be terminated or reassessed as soon as the debt is repaid or the current lease is up.

If you’re dealing with suppliers, discuss limiting the timeframe of your personal guarantee to two or three years, during which you can prove your reliability.

Your personal guarantee might not have an explicit end date — many cover current loans and future debts.

Your personal guarantee might not have an explicit end date — many cover current loans and future debts.

This means even if you pay off your loan in full, you will still be personally liable for any future financing or credit card debt. This is standard practice, but you might be able to negotiate this upfront.

Understand your liabilities

Whether taking out a home loan or agreeing to a personal guarantee, assess what the potential pitfalls and payoffs are. If you’re unsure, get advice from a lawyer or business coach.

“Business is risky by nature,” Hockley says. “It all comes down to being really aware of what you’re doing and what you’re agreeing to.”

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