By Bruce G.
Posner If you're looking for a new-business loan, don't be surprised when the banker leans across the desk and asks for a personal guarantee as one form of collateral. But before you sign your name or pledge personal assets, understand that all guarantees aren't alike -- and that the exact wording is sometimes negotiable, though only at the time the loan agreement is signed.
With an unlimited guarantee, the guarantor stands behind the entire loan or credit line. You're guarantee collateral for options on the hook until the debt is paid.
Bankers push for these guarantees in the belief that the more exposed you are, the more focused you'll be about meeting the loan's terms. A limited guarantee is less encompassing than a complete guarantee, making it more palatable to the borrower and less secure to the lender. The requirements can be stiff, however.
If the business can't meet loan payments, the bank, knowing it's not fully protected, will try to get part of the loan repaid by collecting receivables and selling assets. Many banks will try to set the loan up as "joint and several," which means they'll ask each of you to stand behind the full amount of the loan. You can try talking them out of it, but whether or not they back off will hinge on the quality of your other collateral and your overall financial strength.
Most guarantees are written to remain in effect until the loan is fully repaid. But some agreements spell out conditions under which personal guarantees property option be eased or lifted.
If, for example, the company has managed to meet specified performance standards for two or three years, the bank might relax its requirements or even tear up the guarantee altogether. Some but not all banks will commit to that in writing at the time the loan is made.
Posner Oct 1,