Applying for a business loan is a fairly standard routine for most corporate business owners both large and small. Whether the funds are required for working capital or capital expenditures, a loan is the most common way to raise money. However, most lenders will require a personal guarantee before agreeing to lend the requested funds to a corporation.
A personal guarantee is a written promise to perform the obligations of, and pay the amount due, by the borrower. The specific language in the guarantee sets out the specific obligations of the guarantor. Essentially, the guarantor is personally liable for all unpaid amounts of the corporation’s loan.
The language in the agreement is usually expansive and covers any and all exceptions that might allow a guarantor to be released from his or her obligations. It also sets out how the lender may collect any outstanding amounts of the loan. The lender has no obligation to attempt to recover the outstanding amounts from the borrower before going after the guarantor.
Typically it is corporations, directors and/or shareholders who are required to sign a personal guarantee. The guarantor may also be required to pledge specific assets, such as real estate or funds held by the lender in other financial institutions.
What’s the risk of signing a personal guarantee?
Guarantees are repayable immediately, on demand, meaning the lender can ‘call in’ the debt at any time at its discretion, after a default by the borrower. If the guarantors’ assets cannot satisfy the amounts, the guarantor remains personally liable for the balance owing.
Personal guarantees are weighted in favour of the lender. Before signing a guarantee, carefully consider the risks and consult with a lawyer.