When you are applying for any business financing, you are expected to comply for a personal guarantee. A personal guarantee is essential in applying for business financing. It is a crucial consideration for significant stakeholders and the company board of directors in looking and deciding for their financing options.
When anticipating to get financing for your business as the company owner, you may consider a personal guarantee as an assurance to get a business loan approval. You will be in direct relationship with the lender that will pursue you if the business goes insolvent.
When business is in a good situation, putting yourself to guarantee agreement is always an attractive option. The business performance and capacity to ensure it is still an opportunity to expand.
However, there are legal basics that you should know before becoming a personal guarantor. You should understand the consequences that can be enforceable if you enter into a personal guarantee agreement.
Understanding the context of personal guarantee
When you give a personal guarantee to a third creditor or party (either a bank or a lending firm), you are agreeing to be shouldering the obligations of another party. It means if your business goes default on paying the loan, you will be willing to step up and pay in their behalf.
Two features to remember
· Consider that personal guarantee must not be a protection of the primary borrower from the accountability of paying the lender. When assessing the details of a contract that claims to be a guarantee, it is essential to know if you need to act as security, a guarantor, or both.
· Your guarantee could be or not be supported by security. It can be charge over your own house because it will be easier for the lender to enforce if credit goes default.
What should you consider when giving your guarantee
A personal guarantee is not enforceable unless it is in writing and signed by the agreeing guarantor. However, always be careful because there are events and scams that someone uses your signature without your consent. Some lenders only require machine operated signatures which often potential for spamming. If in cases legal implications happen, your name will stand to be binding.
It is unlikely to happen that when any negotiations with a lender seeking to enforce the guarantee will be straightforward. It occurs when your business is in a financial situation that is drifting towards collapse. So, it would be best if you considered negotiations and discussions of terms that will not put you too much risk and pressure. Your scope of reducing your liability will be controlled and managed well.
One way to reduce the risk and impact is to plan and consider the cap of your liabilities at the drafting stage of the agreement. However, not all lender will allow you to have space to negotiate. However, if given the opportunity, be prepared to by knowing your current capacities so you can mitigate your potential losses.
Key points to look at in terms of the guarantee
- How do the creditors enforce the words in the contract?
- Will they send you to notice or seek demand payment?
- What exactly will cover a default?
- Is there a remedy period given?
- How do they assess your net assets before the approval of the guarantee? Will this change?
- Will the creditor exhaust all means to resolve the debt before making any demands on you?
Types of Personal Guarantees
Unlimited personal guarantees
· You agree to allow the lender to recover 100% of the loan amount plus any legal fees
· If the business fails, your lender can hire lawyers and go after your life savings, retirement, kids college fund, house, car, and other assets to cover the full cost of the loan plus fees
Limited personal guarantees
- Set a limit on what the creditor can fo after from you as the borrower
- Often used when multiple business partners get a loan together
- SBA standard required anyone with a 20% or more significant share in the business must be part of guaranteeing process.
Before you affix your signature, check if you are signing a “several guarantee” or “joint and several guarantees.”
· It has a predetermined percentage of liability
· You will know the maximum you may owe in a worst case scenario
Joint and several guarantees
- You are accountable for the full amount of the debt
- The lender can seek the total amount from any of the parties listed in the guarantee
- If for example your business partners are gone after the business fails, the lender can come after you for your stake in the guarantee and whatever portion remains unpaid from your partners