Personal Guarantees

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This was a site I ran across, although this site is geared towards the vendors granting credit, it provides very interesting info on the validity of a personal guarantee where a title is included by signing officer's name:

 

http://www.ircsystems.com/credittips.htm

 

And here's more info:

 

What is a Personal Guarantee?

By Niki Chawda, M.B.A.

 

A guarantee by an individual pledging the individual’s own personal assets against liabilities is commonly referred to as a Personal Guarantee.

 

Personal Guarantee and Businesses

 

A Personal Guarantee is a promise that a loan will be repaid, in case the business fails. Unless a business is well established and its total assets exceed all loans by a healthy margin, most lenders will require Personal Guarantees from the owners of the business. They may even require you to take a second mortgage on your home, or secure your Personal Guarantee with some other type of collateral. This is a common method used by most lenders to reduce their risk. Owners of large businesses, with millions in annual sales, are still asked to personally guarantee the company's business loans.

 

Many business owners have queries about how a Personal Guarantee works. While funding a deal, entrepreneurs need to carefully consider the potential impact of signing a Personal Guarantee. The main concern is always the liability for the obligation agreed to by the firm.

 

What are the Implications of Signing a Personal Guarantee?

 

“Personal” refers to “you”, the individual. If your business is a proprietorship, the line between personal and business does not exist. But even in the case of a Limited Liability Company or a Corporation, differentiating between the owner and the business can be very difficult. This is because it is not the company's name on the agreement – it is your own name. Hence, if you have signed a Personal Guarantee “you” (and not the company) are liable in case of a default.

 

“Guarantee” refers to a “pledge” or “an assurance”. Hence, the term "Personal Guarantee" would translate to an individual pledge that you provide for an obligation. In other words, you are personally pledging that you will make good on any obligation that you have agreed to stand guarantee for. This holds true even if your form of business provides limited liability protection under the law.

 

Another aspect about Personal Guarantees is that most of them require joint and several liability. This means that each individual who signs a guarantee can be held responsible for the whole amount of the loan. Consequently, even if someone holds only a 10 percent share in the business, that person is personally liable for 100 percent of the amount being guaranteed. The guarantors can be sued individually or all together. There is no requirement that before the guarantor can be held responsible, the lender must show that the primary borrower named in the loan document, e.g., the business, is unable to pay the loan. In effect, when you sign a Personal Guarantee, you become personally liable for the loan, even if your business is incorporated.

 

Personal Guarantees and Various Business Forms

 

Businesses are usually set up under various legal forms. Some of these provide limited liability protection that is inherent in the structure to protect and separate personal assets of the owners of the company from those that belong to the company itself. Other businesses however, expose the owners to unlimited liability, where the owners’ personal assets are unprotected from claims made against the company.

 

Proprietorship. Say you own a company that has an operating name different from your name (this is referred to as a DBA). You have no liability protection inherent in the company's organizational structure. So even though the company’s name appears on contractual documents, the business is still one and the same with you. You are completely liable to cover losses arising from business obligations.

 

Partnership. In case of a partnership, you and your partners (including general partners, who participate in the daily management of the firm, and limited partners, who are passive investors without any managerial powers) run the business. You may operate the firm under the company name, but you and the general partners are still considered one and the same with the business. The law does not protect you from any liability arising from business losses. The limited partners however do have specific legal protection from liability (but laws regarding this may vary from state to state.)

 

Corporation. In case of a corporation (depending on the form chosen and the state in which incorporation is originated), the shareholders are the owners of the company. However, most laws treat the company as an independent, tax-paying entity. You may be a majority shareholder in the company, but the organizational structure provides a level of limited liability protection for you and other shareholders. In most cases, the firm's name is on all the legal documents, and in the event of a failure to make good on a certain obligation, the liability belongs to the corporation.

 

What you must realize is that much of the protection associated with a corporation will be lost if you give a Personal Guarantee. The rule of thumb is that even though the corporation provides a certain degree of liability protection to shareholders, any individual who provides a Personal Guarantee (even if that person is a shareholder) has contractually agreed to make good on the obligation in the event the corporation cannot.

 

The Personal Guarantee is like having a co-signer on a loan. The creditor will approach this person if the primary borrower cannot meet his financial obligation. This could pertain to a partnership agreement with a person or another firm, a real estate lease with a landlord, or various types of loans.

 

Providing a Personal Guarantee is often viewed as a separate issue from whether or not you have limited liability within a company's organizational structure. The best approach is to make sure any company obligations are truly the company's concern alone and that your individual name is not included in the documentation. So when you sign a Personal Guarantee, be prepared to cover that obligation in the event the business cannot.

 

Personal Guarantee: What to look out for

 

A lender or a lessor will generally not require a Personal Guarantee if he or she can be persuaded that the business or proposed venture is sound. You should try to convince them that your company is going to be successful and that they should rely solely on the business for payment. If they do not agree, you should not enter into a deal with them.

 

However, if you get turned down too often, maybe it is time you realised that your prospects for success are not all that high. Maybe your business plan is not really as good as you think it is. On the other hand, if you sign a Personal Guarantee, you are placing all of your assets at the mercy of a particular business deal and you are undertaking a risk with high odds.

 

Most banks go about forcing people to sign Personal Guarantees while availing of a business loan. The banker very matter-of-factly states that as per their routine lending policies, a Personal Guarantee is mandatory for all the owners of the business, and their spouses. Avoid falling into this trap.

 

With some lenders, the name of the game is "take it or leave it". Either you sign a guarantee or there is no deal at all. However, depending upon collateral and the creditworthiness of your business, there is always room for negotiation. Particularly whilst dealing with smaller community banks. The banker is obviously not going to tell you all this.

 

Always try to highlight the fact that your business has sufficient collateral to secure the loan and that pledging your personal assets is not necessitated. As your business matures and you are able to establish a good credit history, the lender's need for Personal Guarantees should correspondingly decline. Meanwhile, you should continue to negotiate the issue of Personal Guarantees whenever your business seeks fresh funds.

 

You might also consider other factors that may be negotiable in lieu of a Personal Guarantee, such as a higher rate of interest, borrowing a lesser amount or for a shorter period of time, or limiting the terms of the guarantee itself (e.g., setting a fixed monetary cap or a percentage of responsibility for the guarantee, or excluding certain personal assets from the guarantee).

 

If the signing of a Personal Guarantee cannot be avoided (as is the case for most business start ups), try negotiating the terms of the agreement. Offer a limited Personal Guarantee, for instance, of say 30% of the loan; or try to modify the capital or net worth minimums that can automatically trigger the Personal Guarantee into play. Finally, if your personal portfolio contains sufficient assets to cover the loan, and your spouse independently owns other assets, ensure that you present a case for not making your spouse sign a Personal Guarantee. Your spouse cannot be legally compelled to sign a Personal Guarantee. However, in most cases, a hypothecation agreement is commonly required. This agreement states that if the bank is required to act upon your Personal Guarantee, your spouse has relinquished his/her rights in the jointly owned property that he/she holds with you.

 

If your business takes on partners or additional owners over time, try to get all new owners in the business to commit to a Personal Guarantee on any pre-existing loans. In a partnership, an incoming partner is usually not liable for pre-existing business debts. He/she will not share the risk for those prior commitments, although he or she may be enjoying benefits derived from that loan. You should try to spread the liability as widely as possible so that even if you are required to pay on the guarantee, you will receive proportionate contributions from other owners. (However, be aware that there may be tax consequences to existing partners when their liability for debts is reduced in this manner. Please consult your tax advisor for more details.)

 

Personal Guarantee: A Word of Caution

 

Whatever the agreement you may enter into, it is very important that you seek expert legal advice about the laws specific to your city and state. This article simply aims to provide an overview of the basic issues related to a Personal Guarantee whilst availing a loan. For more information on how you can legally avoid losing your assets to personal guarantees, click here

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FindLaw: Library: Subject: Business/Small Business Law: Debtor/Creditor

 

 

 

Collecting Commercial Accounts Receivable --Obtaining A Personal Guarantee Of Payment

Grim, Biehn & Thatcher

 

 

In the first article in this series, I discussed the necessity of a well drafted written Credit Application and Agreement to increase the probability of collection in the event of a default in payment terms. In that article, I recommended that you consider adding language to your document creating a personal guarantee by the principal or principals for credit extended to a corporate account. Absent a personal guarantee, a corporation exists as a separate entity under Pennsylvania law and the Credit Application and Agreement would bind only the corporation for payment of the credit sales.

 

A published decision of the Bucks County Court of Common Pleas reaffirms the viability of personal guarantee language in the Credit Application and Agreement. In the case of Allied Building Products Corp. v. Hilton Roofing, Inc., 64 Bucks Co. L. Rep. 259 (April 19, 1994), the Court held that an officer of a corporation is personally liable for a debt of the corporation when the officer signs a Credit Application containing personal guarantee language, even when the officer signs the document in his corporate capacity. In reaching this conclusion, the Court reasoned that to establish an enforceable guarantee contract, it is not necessary that consideration pass directly to the surety; the extension of credit to the principal debtor is sufficient consideration for the promise of the surety.

 

Under the facts of this case, the personal guarantee language was printed in capital letters immediately above the signature line. The paragraph read as follows:

 

"In consideration of Allied Building Products Corp., its subsidiaries or affiliates, extending credit, I/we jointly and severally do personally guarantee unconditionally, at all times, to Allied Building Products Corporation, its subsidiaries or affiliates, the payment of indebtedness or balance of indebtedness of the within named firm."

 

The Court found that the individual signing the document on behalf of the corporation was an officer of the corporation, namely the secretary. The Court therefore concluded that he was personally responsible for the corporation''s debts under the language of the credit application. The Court went further to suggest that even if he was not an officer of the corporation he would still be liable for the corporation''s debts since the Court determined that the Plaintiff had relied upon the guarantee before it extended credit in this case. Once the plaintiff delivered the materials, consideration existed and the individual signing the credit application became liable for the corporation''s debt. The Court did not find credible the officer''s contention that he was unaware that signing the credit application would make him individually liable. The Court noted that it is well established that one having the capacity to understand a written document and who signs it is bound by his signature. Obtaining the personal guarantee of an officer of the corporation may be just that additional point of leverage necessary to make a successful collection of a delinquent account. By obtaining the personal guarantee, you effectively eliminate the ability of the principal to deflect responsibility for contracts of the principal''s corporation.

 

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© 1999 Grim, Biehn & Thatcher

 

These materials have been prepared for educational and information purposes only. They are not legal advice or legal opinions on any specific matters. Transmission of the information is not intended to create, and receipt does not constitute, a lawyer-client relationship between FindLaw, the author(s), or the publisher (Law Firm, Bar Association or other legal publisher) and you. Internet subscribers and online readers should not act upon this information without seeking professional counsel. The opinions expressed in the articles found on Library are those of the author(s), or the publisher (Law Firm, Bar Association or other legal publisher) and not those of FindLaw.

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Release Me! Escaping the Personal Guarantee: http://www.bankrate-small-business.com/smb...?story_uid=1543

 

Why Should I Give You My Personal Guarantee?: http://209.116.252.254/2_1997/cantrell.html