The promise behind a personal guarantee

A personal guarantee can commit the owner to a future payment without putting money into the company today. The bank balance may be unchanged while the owner's promises have changed.

In Chapter 5 of Infinite Upside, Vijay Sheth includes personal guarantees among the things a founder can supply without a separate payment from the company. Chapter 13 adds a consequence worth keeping beside that contribution: closing an operation would not necessarily end a lease or guarantee.

The NCUA's examiner guide on personal guarantees describes a separate agreement through which an owner can take on responsibility for business obligations. The particular agreement matters. An ownership percentage or an intention to stop helping cannot supply its terms.

The company borrows; the owner promises

Consider an invented owner, Rowan, and a small equipment-service company. The company has a loan balance of $18,000 due on May 31. No other interest or charges are included in this example.

Rowan has separately promised to pay the amount left unpaid at that date, up to a total personal payment of $12,000. Under the supplied terms, the lender must send a written request on June 1, and Rowan's payment is due on June 7. The promise concerns this identified loan and ends when the loan is paid in full. These are the fictional terms used for this comparison.

If the company pays the full $18,000 on May 31, Rowan makes no payment under that promise. That possible ending does not mean there was no commitment while repayment remained uncertain.

Now suppose the company pays $6,000 on May 31 and cannot pay the remaining $12,000. The lender sends the specified request on June 1. Rowan owes $12,000 on June 7 under the terms of the example. The money has to come from somewhere available to Rowan at that date.

The company's earlier loan receipt was not a personal receipt for Rowan. The company's $6,000 payment is not money Rowan can spend at home. The personal guarantee connects the unpaid business obligation to a separate source of payment.

The cash was not all uncommitted

Suppose Rowan has $20,000 available personally on June 1. Household payments of $8,000 are due on June 6. With no other receipts or payments, those obligations leave $12,000 for June 7. The guarantee payment can be made, leaving no cash from the stated opening amount.

Before the missed company payment, Rowan was also considering a $6,000 personal purchase on June 5. That purchase has not been promised. If it goes ahead, the household payments leave only $6,000 for the $12,000 guarantee call. The proposed purchase creates a $6,000 gap in this branch.

The purchase and the guarantee did not each have a separate $20,000 behind them. They were being considered against the same personal money. Looking only at the bank balance before either payment would hide the conflict.

This does not establish that Rowan must keep $12,000 untouched under every possible future circumstance. In the other branch, the company pays its loan. It establishes what this particular nonpayment would require and which proposed personal choice would leave that requirement unfunded.

A company receipt expected later might change the situation if it arrives in time and can actually reduce the amount due. It cannot be counted twice, first as the company's repayment and then as a separate personal reserve. Nor does a hope of another loan supply a payment already arranged.

A limit needs its own description

The $12,000 in this example is a total personal-payment limit supplied in the terms. It is not a percentage inferred from Rowan's ownership. Another agreement could describe the obligation differently, include other amounts or have a different point at which payment can be requested.

Read what any stated limit actually limits. Is it a maximum personal payment, a balance at which the promise ends or something else? Which loan and charges are covered? What changes if the company repays part of the debt? A reassuring number is difficult to use until those questions have answers.

The same care applies to the end of the promise. In Rowan's fictional agreement, full repayment ends it. Deciding to sell the company or stop putting new money into it has not been supplied as a release. Those are different events.

Separate new help from an existing promise

An owner considering a voluntary rescue asks what another transfer would accomplish. An owner responding to a guarantee also needs to understand a promise already made. The two questions can arise in the same difficult month without becoming the same choice.

Put the identified debt, the payment trigger, the amount and the dates beside the resources expected to meet them. Keep uncertain receipts marked as uncertain. Then examine the other commitments relying on those resources. That gives the next personal purchase a fuller comparison than the balance on its own.