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4 Types of Guarantees: What Are You Getting Into?





The dictionary defines “guarantee” as the assurance for the fulfillment of a condition. When it comes to business, there are different types of guarantees. Some are given to customers, some to lenders, and some to other third parties. To help understand the legal and financial promises you’re making when you give a guarantee, here is some basic information on various types of guarantees.



4 Types Of Guarantees

Personal Guarantee

If your business obtains financing, you may be required to give a personal guarantee, which means that if the business fails to repay the loan, you’re on the hook. (If you’re married, your spouse may also be required to give his/her personal guarantee.)

With a personal guarantee, you may be liable not only for the outstanding balance of the loan, but also for default interest, the lender’s legal fees, and other costs. Examples of guarantee situations:

  • SBA loans. In the case of SBA loans, all owners with a 20 percent or greater interest in the business must give their personal guarantee.
  • Vehicle purchases. Expect to give a personal guarantee if the business finances the purchase of a vehicle through the dealer.
  • Leases. You probably have to give a personal guarantee when renting space for 3 years or more, especially if your business is a startup.
  • Business credit cards. Again, an owner’s personal guarantee may be required for this purpose.

Note: You may be able to negotiate limits on your personal guarantee. Ask that your guarantee be limited in time or amount; it doesn’t hurt to ask.

Validity Guarantee

This is a less comprehensive guarantee used by factoring companies. I’d never heard of it until a reader of mine asked me about it.

The promise here is that the invoices you turn over to a factor are valid, have not been pledged to another company, and are collectible. You also promise that if you receive payment on an invoice you’ve turned over to the factor (a “misdirected payment”), you’ll remit the funds to the factor. Unlike with a personal guarantee that some factors may require, with a validity guarantee you don’t tie your personal assets to customer defaults.





Warranties

A warranty is a type of guarantee, assuring customers that the goods you sell are good. It’s part of the purchase price for an item. Standing behind the goods you sell makes good business sense, but there are different types of warranties; be sure you know what you’re promising your customers.

  • Implied warranties. It’s not anything you say; it’s the promise that state law creates and that you must support. For example, under the Uniform Commercial Code, there’s an implied warranty with the sale of goods of “merchantability.” This means that the goods are what you say they are and there’s nothing wrong with them.
  • Express warranties. These are promises you make — verbally or in writing — about the goods you sell (oral warranties are difficult for consumers to enforce). Express warranties can be full or limited. “Full” means the customer gets his/her money back, a replacement, or a repair (and a refund if the replacement/repair is not satisfactory). “Limited” means what it says: you can limit the time or the action you’ll take if there’s a problem as long as you prominently display this limitation.

There’s more information about written and implied warranties from the Federal Trade Commission.

Note: From a legal perspective, an extended warranty isn’t really a warranty; it’s a service contract sold separately from the item.

Bonds

Don’t think U.S. savings bonds — think putting money where your mouth is. There are various types of bonds related to business:

  • Performance bond. If you win a bid to perform work but don’t complete the job, or at least not satisfactorily or on time, the bond you put up as part of a contract helps the customer/buyer complete the work you should have done.
  • Bid bond. It may be required if you want a public contract; it assures that you’ll do the work if you win the bid.
  • Warranty bond. If you export goods, the bond is collateral for the goods to be delivered.

Conclusion

Recognize that using various types of guarantees are part of running a business. It’s good to know that your personal guarantee of business loans usually doesn’t impact your personal credit rating … unless you’re called upon to keep your promise but default. Always talk with an attorney to understand your legal and financial obligations for any promises you make.





Guarantee Photo via Shutterstock
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Barbara Weltman


Barbara Weltman Barbara Weltman is the Tax Columnist for Small Business Trends. She is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and is a trusted professional advocate for small businesses and entrepreneurs.

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