Should You Do a Personal Guarantee for Your Retail Store?

Pros and Cons of a Personal Guarantee

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It's tempting. You need credit or a new vendor account for your retail store and all you have to do is sign your name to the bottom line. Doesn't seem like that big of a deal, after all, isn't this the type of risk an entrepreneur takes? Going all in?

Retail is a risky investment for banks and lenders. Even the Small Business Association (SBA), who I got my first loan through, now requires that all loans provided through the SBA must be personally guaranteed by anyone with 20 percent or more ownership in the store.

When you sign as a personal guarantee on a note for your retail store, it is an unsecured debt. In other words, you are not listing your house as collateral. However, if the debt is not paid, you are personally liable to pay it — meaning that creditors can come after you personally which may cost you your house or car if you have to sell them to satisfy the debt.

When I opened a new line of products in my shoe stores, I was often asked to sign a personal guarantee. Sure, once the business gets large enough, they would accept financial statements in lieu of the guarantee, but that is a very large business, not the typical retail owner. Before you sign that dotted line, you should consult an advisor or partner. When you are the owner, it's easy to have a distorted faith in your store. After all, a $500 line of credit with a vendor is no big deal, you may think. But one account gone wrong can put them all at risk.

I have consulted with retailers who lost vendor accounts because the vendors found out about the non-payment to another vendor. Many vendors use a "factor" to collect their debts. This is an outsourced accounting function that has an odd side effect — the same factor works for several different vendors.

So if you are wondering how in the world did the other vendors find out? Now you know. 

Approach the decision to sign a personal guarantee the same as all of your business decisions. This is why I suggest discussing it with a trusted advisor first. Personally, I preferred to keep my savings (cash) in the bank and sign the guarantee. After all, cash is king in retail. When you hit that slump in sales (and you will) you have a safety net. Many small business owners choose to use their personal savings rather than the guarantee, which has its merits. But remember, the solvency of your dream is based on you having cash available to pay for it. I have sat across the table of many retailers who are stunned by the P&L that says they are making money, but they cannot pay their bills; they cannot cash flow the business. 

The Risks

There are lots of ways to finance your retail business, but all of them will include some risk on your part. For example, if you use your 401k to start, that puts your retirement at risk. Or if you borrow from a family member, that puts your relationship at risk (and perhaps your invitation to Thanksgiving.)

Obviously, the main risk is your personal credit or net worth if you have to make good on the debt.

I made the mistake of selling one of my retail stores thinking that all of the debt went with the sale. A few years later, when the new owners stopped paying one of the accounts, I started getting calls. Even though I had no ownership in the business anymore, I had signed a personal guarantee when the account was opened, and therefore, the bank still held me liable. I would love to tell you that it all ended happily, but not for me. I had to pay.  

Another risk may be to your spouse. Most banks will require a spouse to sign as well if the loan amount is above a certain limit. 

Compared to other forms of financing that may include interest payments, a personal guarantee seems less costly. But that is not always the case. Be objective when making the decision. And keep track of where you have placed your "mark" as a personal guarantee.

I have found many retailers who have no clue how many times they have signed the guarantee and thus have no idea of the risk of their dream.