Think before you put your home on the line for your salon business
Have you given a personal guarantee for your salon?
Perhaps guaranteed a bank debt, the salon rent or an equipment loan?
You might not have even realised you were giving a personal guarantee and signed it without a second thought.
It’s almost standard practice these days for banks, landlords and finance companies to ask for personal guarantees when a small company is involved. But just because it’s common, and almost unavoidable, it doesn’t mean you should just sign it.
Being a guarantor (the person guaranteeing the loan or rent) can have a serious impact on your future financial security, borrowing capacity and even wealth. Because of this you should always take legal advice first.
When would a salon owner be asked for a personal guarantee?
If you’re starting a new salon or spa and borrowing money, leasing equipment or taking premises then keep your eyes peeled. A personal guarantee document won’t necessarily be obvious in the pile of ‘standard’ paperwork you’re being asked to complete. But sign it and you’re on the hook for the lot.
What exactly is a personal guarantee?
A personal guarantee is usually for a set amount, plus interest, and is payable on demand by you (personally) should your company default on the loan agreement or fail to pay the rent.
Typically the guarantee document states:
- You can’t just cancel it and walk away if you change your mind at a later date.
- Just because there aren’t any payments outstanding by your company, your personal guarantee remains in existence.
- There often isn’t an end or expiry date. Your personal guarantee just continues.
Can banks enforce a personal guarantee against me if my salon defaults?
Yes. And they will.
Salon business owners often don’t realise how far-reaching the banks’ powers are to recover the money.
If the personal guarantee is called on (because your salon company fails to make re-payments) the bank can take legal proceedings against you as guarantor. Your family home and other personal possessions, such as savings and cars, may be at risk.
Worse still, if your personal assets aren’t sufficient to repay the monies in full, a bankruptcy order can be made against you.
Does it help that my business partner is giving a guarantee too?
Don’t relax because you and your business partner are both being asked to sign a guarantee. You are not halving your personal risk.
Where two people give a guarantee the bank may require either one of them, or both of them, to pay. The bank does not have to equally spread the debt between you. In fact, it’s likely that the bank will go after the person with the greatest assets.
If this happens, you are entitled to recover a fair share from your co-guarantor (if they have any money or assets) but this involves more lawyers, costs and hassle.
Always get legal advice before signing a personal guarantee for your salon business
With such far-reaching consequences, you can see why it’s so important to see a lawyer before you sign on the dotted line. This is your best chance to mitigate your potential losses. The bank won’t budge once the ink is dried on their guarantee and they’ve got you on the hook.
Whilst you’ll still have to give a guarantee, a lawyer may be able to limit the extent of your liability – perhaps negotiate a cap on the amount or agree a trigger clause to end the guarantee.
Don’t forget personal guarantees when you sell your salon
You’re leaving the salon and retiring to a beach or golf course in Spain. Result.
Hang on. Is there something you’ve forgotten? Yep. You need to get a release of your personal guarantee from the bank.
Your solicitor will deal with this if he knows about the personal guarantee. The trouble is, many guarantees get forgotten over the years and this release gets overlooked. In which case, you can find yourself in the unhappy position of being personally liable for the debts of a company that you no longer have anything to do with. Or control over.
Personal guarantees are a commercial necessity when you’re running a business – just make sure you get the best terms before you grab a pen and sign.