Small Business Owners with Personal Guarantee? What You Need to Know

_{By Bromwich+Smith Staff | 1169 words | Reading Time: 6 minutes | Date: 2023/05/11}

In Canada, there are over 1.19 employer businesses with almost 98% of those being small businesses. We know that operating a small business, while rewarding can be overwhelming with operations and marketing, production and sales. The first thing to explore with any business, is cash flow and how to manage finances. It is important to take the time and start off right with the right team helping you manage your income otherwise you may find yourself in debt. 

Debt in a small business can accumulate from a small business loan, using lines of credit or even credit cards to purchase the items your business means. When looking at various forms of debt it is important to understand the terms. 

1. Credit cards. Often business owners will use their own personal credit cards to purchase items for their business. You may want to consider having a separate card that you use for business expenses vs personal expenses to help keep things separated.  

2. Line of credit. These revolving accounts help you borrow credit and repay the debt as needed.  

3. Small Business loans. Income up front, with a fixed interest rate and set repayment terms and period.  

Often, you may be required to provide a personal guarantee if you are trying to obtain a loan for your business, but what does that mean for your personal finances? This legally binding contract means that you the business owner guarantees that you will be personally responsible to repay the debt in the chance that the business is unable to.  This ensures that the debt will be paid even if the business fails. Often lending money to a small business owner many be a big risk as the business itself may not be creditworthy. However, if the owner is willing to place a guarantee on the debt it shows that they believe in their business, and their ability to repay the debt. Guarantees are often looked at as collateral which builds confidence for the lender.  

What are the risks of a personal guarantee? 

If your business is unable to repay the debt, due to slow growth or in the case of business closure you personally are responsible. The lender can come after your person assets to repay the debt owed. This can include persona savings, investments or even your home. It is important to have the right financial team to help support you and your business. You may feel overwhelmed with separating your personal and work finances, having a team of financial professionals will help you and your business.  

How to manage small business debt 

1. Start by understanding your business debt. Understanding who your business owes money to, as well as the terms of the debt will help know what and when you need to repay.  

2. Create a plan. Just like with any debt, make a plan for repayment. There are many methods of debt repayment and not every solution will work for each individual and that is ok! The important thing is that you try something and that you are willing to review and try something new if needed. Some people will repay debt through the snowball effect, starting with the smallest loan first. Once it is paid off, those payments go towards the next debt and so on. Others find success in paying off the highest interest debt first. There is no wrong answer, as long as you are actively working towards repayment.  

3. Build Credit for your business. This can start with opening a bank account under your business name, and then credit cards. Just like building your own personal credit, having credit for your business will help your business grow. If your business has enough credit, you may not be required to personally guarantee your business loans. 

We understand that it is difficult for many small businesses, and small business owners to avoid debt. If you are struggling with debt it is important to reach out to a Licenced Insolvency Trustees, as they are the only ones federally regulated in Canada to help you with debt relief programs.  Bromwich+Smith has a team of debt relief specialists available to offer debt advice and debt restructuring entirely from the comfort of your own home. Reach out Today for a FREE personalized debt consultation by phone at 1-855-884-9243 or via the contact us page. 

FAQ Related Small Business Owners with Personal Guarantee:

1- How can I manage my small business debt effectively? 
 
To manage your small business debt effectively, start by understanding your debt obligations, including the creditors and repayment terms. Essentially know who you owe money to, and how much you owe.  Create a repayment plan that suits your financial situation, considering methods like the snowball effect (paying off the smallest loan first) or focusing on high-interest debt. Building credit for your business by opening a bank account and using business credit cards can help your business grow and potentially eliminate the need for personal guarantees on loans. 
 
2- What does it mean to provide a personal guarantee for a small business loan? 
 
Providing a personal guarantee for a small business loan means that as the business owner, you assume personal responsibility for repaying the debt if the business is unable to do so. This legally binding contract ensures that the debt will be paid even if the business fails. By offering a personal guarantee, you demonstrate confidence in your business and increase the lender's confidence in your creditworthiness, potentially facilitating loan approval. 
 
3- What are the risks associated with a personal guarantee for a small business loan? 
 
The risks of a personal guarantee include personal liability for the debt in case your business cannot repay it. If your business experiences slow growth or closes, the lender can pursue your personal assets, such as savings, investments, or even your home, to recover the debt owed. It is crucial to have a knowledgeable financial team to guide you in managing your personal and business finances effectively. 
 
4- How can I separate my personal and business finances when using credit cards for my small business expenses? 

To separate your personal and business finances when using credit cards for small business expenses, it is advisable to have a dedicated card for business-related transactions. By having a separate card solely for business expenses, you can maintain clear financial separation and easily track your business expenditures. This practice helps with accurate bookkeeping and simplifies tax filing processes. 
 
5- What is the importance of having a team of financial professionals to support my small business? 
 
Having a team of financial professionals to support your small business is essential for several reasons. They can help you navigate the complexities of managing business finances, including debt management, cash flow, and financial planning. These professionals can provide valuable guidance on separating personal and business finances, creating repayment plans, building business credit, and minimizing financial risks. Their expertise and advice can contribute to the success and stability of your small business.