Nearly every successful business will decide at some point that the time is right to expand. For most, this will mean a need to search for a new source of capital. Whether your business is borrowing from a financing seller, bank or a credit union, you may be required to sign a personal guarantee to secure financing.
A guarantee is a written promise given by the guarantor (the business owner, business executive or even some other entity related to the borrower) that guarantees payment of the debt. In the event of non-payment by the borrower, a lender can seek payment directly from the guarantor. In most cases a typical guarantee agreement will not require the lender to exhaust all possible avenues of payment from the borrower before seeking payment from the guarantor. If there are multiple guarantors, it is likely that a lender can pursue any one or more of them. For example, if a lender determines that one guarantor has particularly significant assets, they may collect directly from that individual. That guarantor would then have to pursue contribution from other guarantors on his/her own.
From a lender’s perspective, personal guarantees are not only useful as a source of additional security on a loan, but also enable a lender to better assess borrowers’ risk of default. Stated otherwise, if a borrower is unwilling or lacking the confidence to put his own assets at risk, why should a lender? A personal guarantee demonstrates to a lender that you are a responsible business owner and intend to repay your debts.
Nevertheless, as a borrower there is a possibility that you may be able to negotiate certain limits to the guarantee. For instance, you might be able to limit the type of debt covered by the guarantee to the specific loan rather than all the debt of the borrower to the lender. Or you can request that the guarantee be unsecured. A lender may still be able to sue you in the event of default, but they will not have an immediate foreclosable security interest in your personal property or real estate. Alternatively, if the lender insists that the guarantee be secured by your personal property or real estate, you may seek limits on how much of your property is included. For example, you might reach an agreement where you pledge a specific account or parcel of property rather than allow a complete pledge of all of your assets.
The above is by no means an exhaustive list of the possible issues involved when facing the prospect of signing a personal guarantee. If your business is expanding and in need of a new source of capital, while a personal guarantee may be unavoidable. the terms may be negotiable. Experienced attorneys at Tishkoff are available to provide advice and guidance, please call our office today. Toll Free: 1 (855) TISH-LAW.