What is a Personal Guaranty and Why is it Needed?

You want to start a small business - you have the perfect idea, people willing to invest in your plan, and people you know you will be able to work with to make your product or service viable. To put the frosting on the cake, you’ve now found the perfect location for your business. But one thing you didn’t know was that you would be asked to make a personal guaranty on the property. What is a personal guaranty? Why is this a big deal?

What is a Personal Guaranty?

Although your grandfather may talk about the good old days when a personal guaranty wasn’t necessary, in today’s business world, it would be quite difficult to find a leasable space without having to provide one. A personal guaranty tells the property owner that, if your business doesn’t go quite as well as you thought it might, he or she will be guaranteed a certain amount of money (lease money) for the length of the lease, regardless of whether you continue on with your business or not. Where will that money come from? Well, if your business isn’t making enough, a personal guaranty states that you, personally, will be responsible for that money. The property owner could sue you personally for the money if necessary. This may sound harsh, but when you consider it from the property owner’s point of view, you might see it as simply covering all bases. This ensures that they aren’t left with a vacated property that may even have been altered to meet a certain business’ needs that might have to be renovated back to attract another renter.

A Personal Guaranty is Proof of Legitimacy

The benefits of a personal guaranty to the landlord are obvious and realistic. If you have made the investment to own rental property, the only way that you will get a profit is to ensure that the building is occupied. The new business owner is willing to take risks in order to prove the value of their business. It’s important to realize that the property owner is also taking a risk on the business by allowing you to rent their property. A lease is a legal document that ensures a certain amount of money over an agreed time period, and a property owner has the right to know that the funds will continue. But why a personal guaranty? The property owner is, in essence, looking at the renter’s personal finances on the theory that, if someone’s personal finances are in order, that person will also be a good risk at keeping their business’s finances in order.