Signing A Personal Guarantee
If you borrowed funds from any institutional lenders – an online lender, a credit union or a bank, you probably have come across and signed a personal guarantee. Signing a personal guarantee makes you responsible for repaying your business loan even if at some point you would not be able to. Furthermore, not all personal guarantees are the same. So, keep yourself mindful about which one would suit you for your particular situation.
A personal guarantee uses unspecified assets of the business owner or the guarantor as collateral for a loan. In the event of a default, the personal guarantee will kick in resulting in personal assets of the being seized. Most frequently, it is signed by the person who has at least 20% of the business shares. The spouses of the guarantors and a loan cosigner also usually sign the personal guarantee.
It is very important to keep in mind that the lenders want to be assured that they will get their investments back. So, when they lend funds to a borrower, the lender wants to be certain that the borrower is completely devoted to his or her business establishment. A lender safeguards itself from many potential risks through a personal guarantee, which renders a lot of power to the lender. Hence, a borrower should be aware of the rights given away when he or she signs a personal guarantee.
Types of Personal Guarantee
It is wise for the borrower to know about the different types of personal guarantees there are, because some might be more beneficial and offer more protection than others. There are two general types of personal guarantees – unlimited agreement and limited agreement.
An unlimited agreement permits the lender to acquire owed money and any incurred legal fees the lender might have if a judgment was imposed against the borrower. If a borrower is a sole proprietor of a business, then unlimited agreement is the only personal guarantee available. Of course, a borrower might be able to negotiate special terms with the lender to give the borrower more protection.
A limited guarantee is a loan agreement signed by multiple business partners of a firm. Given this condition of the personal guarantee, the partners have a choice of either a joint and several guarantee or a several guarantee. A joint and several guarantee is a limited guarantee in which each guarantor is responsible for the full amount of the loan. On the contrary, a several guarantee renders a percentage to each guarantor. The percentage represents what each partner owes in outstanding capital and legal fees. It is usually recommended for partners to go with the several guarantee because every individual’s responsibility is mutually exclusive.
If a borrower defaults on his or her business loan, it would be hard for a lender to seize assets unless they were collateralized (and even then, it’s a challenge). A lender will usually take the borrower to court and get a judgment against the borrower to recoup lost capital. With a judgment against the borrower, the lender could be able to expropriate the borrower’s business or personal assets.
Do you need to sign a personal guarantee?
If you need a business loan, then yes, unless a lender miraculously doesn’t require it. It is common that those who don’t require it charge an insurmountable amount of interests and fees.
Whenever you consider signing a personal guarantee, always read over all the terms and conditions carefully. If you don’t understand or aren’t clear about some parts of the agreement, it would be wise to seek a legal professional to help you. Don’t forget, you have the right to negotiate special terms if you deem necessary. If you feel like you are signing a personal guarantee agreement that doesn’t suit your situation, it would be advised to walk away and search for other lenders.
If have already signed a personal guarantee and have a judgment against you, our attorneys at Shipkevich PLLC can assist. Schedule your free initial consultation today.