What are personal guarantees and why have them?

When getting a merchant account, many payment processors will ask for a personal guarantee. There are some cases where this may not happen, for example in businesses that have been around for many years or a business that is very low risk.

It is understandable to feel a little uneasy when signing a personal guarantee. Your business could go out of business for all you know. Payment processors ask for this because they are the ones that are liable if you do not deliver the right products or services and end up owing money. 

For example, let’s say you just opened a furniture store. You make the furniture and you love it. Your website is awesome and you know a lot of people that want to buy your furniture. You’re so good that 40 people asked for tables for $3k each. That’s $120,000! Amazing. You take half the money from people so you can afford the tools and raw material. So, you processed $60,000.

You start to build your furniture but unfortunately a fire starts and burns your raw material and your home office. That’s bad news and you now don’t have the money to fix your place or pay back the $60,000 to your customers. And you have no way to finish building the furniture. 

The payment processor is liable for that loss. A personal guarantee put you and the payment processor on the same team to ensure the right products and services get into the hands of your customers.