Most small business at some point or the other will require some sort of loan to finance operations, stock inventory, expand or by equipment etc. Unfortunately, accepting finance from a lender usually means signing a personal guarantee. Signing a personal guarantee indicates to the lender that you take personal responsibility for payment of the loan should your business fail to pay the lender. There are different types of guarantees and you should be aware of all the options and implications before you sign.
By signing a personal guarantee, the guarantor (the person who signs the personal guarantee) becomes responsible to pay the lender if the business cannot pay the loan with his or her personal assets. Usually the lender will require anybody who owns 20% or more of the business to sign a personal guarantee. The spouses of the guarantors are commonly asks to sign as well. Since this agreement is not tied to any specific asset, the loan with a personal guarantee is not considered a secured loan. Most lenders who advertise unsecured loans may still require this agreement.
Lenders always want to ensure that they get their money back. Personal guarantees give lenders all the power. Losing business or personal assets is very painful. By understanding the different types of agreements, you will be able to decide on the best option for you.
Unlimited Guarantee: By signing an unlimited personal guarantee, you are giving the lender permission to collect the monies owing to them as well as the legal fees that are incurred by the lender’s legal representatives. This type of agreement is only available to single owner businesses.
Limited Guarantee: This type of agreement is utilized when there are more than one or multiple business partners that need to sign guarantees. There are two types of limited guarantees: a several guarantee and a joint and several guarantee.
- Several Guarantee: This agreement means that all the partners of the business are responsible for payment of specific percentages of the debt. This usually is determined by how much of the business each partner owns. This is a good option because each partner knows exactly what they owe if the business fails to pay the loan.
- Joint and Several Guarantee: This agreement means that each partner is responsible for the full amount of the loan. This can become very complicated if the business defaults on the loan.
If the business defaults on the loan, lenders may or may not enforce the guarantee agreement. Lenders will take different factors into consideration like, how much the business owes and how much assets the guarantor or guarantors own. Enforcing a personal guarantee may be difficult since specific assets are not tied to the agreement. The lender may attempt to get a judgment against you in order to regain lost capital. Once the lender gains judgment against you, they may be able to seize business assets, personal assets or obtain a garnishment order against your wages. Lenders may decide not to enforce the guarantee agreement if they decide that they cannot recover most or part of their funds. Your credit score will be affected negatively even if the lender decides not to sue you.
If you facing a lawsuit as a result of signing a personal guarantee, speak to our business debt relief lawyers today and find out how we can help you.