If you’re operating as a corporation (or LLC or the like), your lender is probably going to require you to “sign personally” as the owner of the business. There are at least two common reasons why lenders want personal guarantees. To ensure they will be repaid, lenders want to see that all the business owners are personally accountable. The bank wants to ensure the owner has “skin in the game”.
If you sign personally, then you’re putting up your own assets to guarantee the bank will be repaid. Personal guarantees make you legally and personally liable for the debt obligation. From a legal standpoint, if your business defaults, the lender can then come after you.
Capitol Group v. Collier, 365 S.W.3d 644, 648 (Mo. Ct. App. 2012).
Jamieson-Chippea Investment Co. v. McClintock, 996 S.W.2d 84, 87 (Mo. Ct. App. E.D. 1999).
Mercantile Trust v. Carp, 648 S.W.2d 920, 923 (Mo. Ct. App. 1983).
The language of the guarantee is what matters. Depending on that language, the lender does not need to chase the business first. (38 Am. Jur. 2d Guaranty § 84, Westlaw, updated May 2020.)
Before providing any personal guarantees for commercial loans, you should understand your obligations and the consequences. Ensure you carefully review all of the paperwork, so you understand the impact of a personal guarantee. There are three parts, in particular, to pay close attention to before signing.
Limited or Unlimited
The scope of a personal guarantee determines whether it is limited or unlimited. Personal guarantees do not have to be all-or-nothing. If you’re asked to sign for the entire loan amount, try to negotiate for an alternative.
Unlimited guarantees make the signer fully obligated for the full amount of the loan, plus related legal fees, if the business defaults. A limited guarantee, though, is limited to a certain amount.
Try to negotiate a cap on your repayment obligation. When you ask for a specific amount to cap your liability, the amount you request should be reasonable. If you share ownership with another shareholder, ask the bank for the amount of your guarantee to be proportional to your share in the business.
If you own 10% of the business and agree to a personal guarantee without a cap, you’re entirely responsible for the obligation. That means, if you guarantee a $500,000.00 loan, the bank can come to you for all of the money if the business defaults. Unlimited guarantees can be problematic in shared ownership situations. If there are two business owners signing for the loan, but both guarantees are unlimited, the lender could come after just one guarantor for the entire amount owed.
Depending on the situation, a bank may also ask your spouse to sign on the loan. You and your spouse should be very cautious and understand all the risks before providing personal guarantees. The Equal Credit Opportunity Act (ECOA) may, in some circumstances, prohibit lenders from forcing married couples to have both spouses sign.
A Waiver of Defense Clause
The second part of the personal guarantee to pay attention to is the waiver of defenses. Most of the standard forms will include a waiver of all defenses other than full payment. The scope of the waiver matters. A waiver of defense clause in the contract can strip you, the guarantor, of your legal defenses. If the borrower defaults, the waiver of defense clause in a personal guarantee typically precludes the guarantor from raising any issues or defenses based on the transaction or the lender’s activities.
A waiver of defense clause can even keep you from arguing that you were induced to execute the agreement by bank officers’ fraudulent misrepresentations. The guarantor would still be obligated to repay the debt. (Landmark Bank of St. Charles County v. Saettele, 784 F. Supp. 1434, 1440 (E.D. Mo. 1992).) Waivers of defenses are serious. Before you sign, think through any transaction.
A Guarantor Who Revokes Their Guarantee
The third part of the personal guarantee to take notice of is the right to revoke. But revocation may count as a default by the borrower on the note. A guarantor who revokes their guarantee may no longer be liable for obligations in the future but still be on thehook for the obligations that occurred in the past. Revocation may be the wisest choice for the minority or silent partner in a failing business. A 10% owner of a shop that now carries $2 million in debt could have revoked earlier, and limited his or her liability.
Personal guarantees can expose guarantors to legal and financial liability. Be cautious before signing. If you want your guarantees to be limited or capped, so you’re not personally liable for the full amount, ask the lender to specify such a limit. Most guarantees will include a waiver of all defenses. That’ll likely include ones for bad faith lending. Ensure you know how and when to exercise your right to revoke.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
