Personal Guaranties Put Your Personal Assets at Risk
Almost every company has financing, particularly small companies. Almost as often, the lender requires that the company owners — the principals — sign personal guaranties for the loan amounts. Some personal guaranty agreements are quite onerous and give the lender:
- The right to go after your home and other personal assets if the loan goes into default — any default, even technical defaults, not just non-payment;
- The right to declare defaults on technicalities even if payments are current;
- The right to declare defaults if you and your company take out additional loans or sell assets;
- The right to declare a default if you die or are incapacitated; and
- The right to demand more collateral if, at the lender’s sole discretion, the lender says the loan is under-collateralized.
Worse still, the personal guaranties are often required to be “joint and several” if the company is owned by more than one person. This lets the bank pick and choose whom they want to sue if there is a default. If the company is owned by one person, the lenders often want the spouse to sign the guaranty too, even if he or she has nothing to do with running the business. Premarital assets might then be at risk.
Needless to say, having your personal assets at risk is worrisome, particularly since you formed your corporate entity precisely to help shield personal assets.
The only solution is to try and negotiate terms that minimize as much as possible your exposure. Here are some suggestions:
- Negotiate a Shorter Guaranty Period Than the Loan Term: Sometimes a good business lawyer can get this concession from the lender. Other times, a shorter period might be acceptable if you can offer a promise of on-time payment or maybe an auto-deduction from the company bank account. Another way this can work is by linking the length of the guaranty to loan-paydown or to loan-to-equity evaluations.
- Carve Out Assets: This can be tough to do, but there should be a reasonable level of personal assets at risk related to the loan amount. No lender should require every single asset be collateral for a business loan.
- Reduce the Number of Signers: Again, this can be tough to do. There is no need for a lender to require guaranties from children and others who have no relationship to the business.
- Negotiate Less Onerous Language: Often lenders will accept some modifications to the guaranty agreement. Try to negotiate less onerous language. For example, insist that any discretion exercised by the lender be exercised “reasonably and in good faith.” Require notices to be given with at least 30 business days and that allow the borrower to cure the defect or default.
- Obtain a Periodic Review: If the lender will agree, obtain a set periodic review of the paydown and loan-to-equity status. This might backfire if the business is struggling, but it is something to be considered.
- Say NO! Try Another Lender: Sometimes the problem is the lender. So, you say “no!” and find a lender with less stringent requirements.
Contact San Diego Corporate Law
As you can see, negotiating a personal guaranty can be challenging. If you are asked to sign a personal guaranty, you should seek the guidance of an experienced business attorney like Michael Leonard, Esq., of San Diego Corporate Law.
If you want more information, contact Mr. Leonard by email by calling (858) 483-9200.