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The risks to business owners of personally guaranteeing a business' financing

According to the U.S. Small Business Administration, the roughly 28 million small businesses in the U.S. account for approximately 54 percent of total annual U.S. sales. For a small business owner, ensuring for the success and growth of a business is often a labor of love and one that comes with many obligations and sacrifices.

While business owners are frequently advised to keep personal finances separate from those of a business, to ensure for a business' success and growth, many business owners make the decision to personally guarantee a business-related loan. Much like an individual who chooses to take out a personal or home loan, it's critical that, if a business subsequently experiences debt problems, a business owner clearly understands his or her obligations with regard to default and repayment.

Depending on the fine print, the personal guarantee of a business loan can mean very different things. The terms of most personal guarantee agreements require that, if a business defaults on a loan, a business owner is obligated to repay the remaining loan amount. Conversely, a personal collection guarantee means that a business owner is only personally liable for the repayment of a defaulted loan after creditors have exhausted all efforts to collect repayment directly from the business.

In addition to understanding one's personal liability with regard to repayment of a business loan, it's also important to explore how one's personal credit score may be impacted by a business default and the related repercussions. When applying for a business credit card, a business owner is often also required to "provide personal information." If a business fails to make credit card payments or otherwise fulfill the terms of a credit card agreement, a business owner's credit score may also take a hit.

In out next blog post, we'll continue to explore how personally guaranteeing a business’ financing can personally impact a business owner.

Source: SBA.gov, "5 Things to Know About Guaranteeing Your Company’s Debt," Barbara Weltman, Jan. 15, 2015

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