If there is a devastating gotcha that can come back to haunt entrepreneurs it is the personal guarantee agreement. What makes this document especially treacherous is entrepreneurs sign them in haste without taking the time to fully understand the implications of the agreement. They don't think personal guarantees have a cash cost, but they can sometime in the future, big time!
A personal guarantee is a document often requested by bank lenders, landlords and equipment leasing agents. It says that if the business is not able to pay the obligation on a timely basis, then the debtor can turn to the entrepreneur and possibly his or her spouse for payment. Organizing your business as a Limited Liability Company or corporation won't shield you from any outstanding personal guarantee obligations. If you have signed a personal guarantee document, then you personally own the obligation.
Startup entrepreneurs can also find hidden personal guarantees in the fine print of business credit card applications. If you look closely you will find a microscopic sentence or two that says that the person signing the application is personally liable for all charges to the card plus any other cards associated with the same account number.
This obligation is relatively straightforward for someone who owns 100% of a company, but what about partnerships? If one partner signs the credit card application, but another partner racks up a monstrous bill, then the credit card company can turn to the applicant signer for payment if the company defaults. And if the bill is not paid on a timely basis, then it is the application signer's personal credit score and credit history that takes the hit, not the big spender. Gotcha!
Susan Schreter is a 20-year veteran of the venture finance community, MBA-level educator and policy advocate for small business owners. Her work is dedicated to improving startup operating performance with reduced personal risk to entrepreneurs. She is the founder of www.takecommand.org, which offers the largest centralized database of regional and national small business funding sources in the U.S., including angel clubs, micro-finance lenders, venture capital funds and more. Follow Susan on Twitter @TakeCommand