Whether your business is brand new or has been around for years, there comes a time when you need to take out a corporate loan. You may need money to expand your business. Or, maybe there’s a new building you want to buy and you need a mortgage. Either way, even if your business is solvent, the bank may demand that you sign a personal guaranty for the loan.
For the most part, if you’re confident that your business is going to be around for years, there’s little risk in signing a personal guaranty. As long as your company makes the loan payments on time, you won’t have anything to worry about.
The problem is that, in this ever-changing economy, there’s no way to know how long your company will be around. You could be doing great one year and filing bankruptcy the next. If for some reason your company has to close or file bankruptcy, the officers of the company can be on the hook for loans and other debts.
If there is no personal guaranty on the loan, there’s not much the bank can do about collecting the debt. If the company shuts its doors, the bank will have to write off the debt. The same is true for a Chapter 11 bankruptcy. If the court approves the bankruptcy, the bank won’t be allowed to go after the company for the money.
If you another officer of the company signed a personal guaranty, the bank will have the option of pursuing you personally for the debt. This is why it’s a good idea to talk to a business lawyer in Connecticut before you sign any personal guaranty.
What is a Personal Guaranty?
When you own or manage a business, there will come a time when you need to borrow money. This could be for a small business loan. It could even be for a credit card or line of credit. If the bank doesn’t trust your business can (or will) repay the debt, they may demand that someone cosign the loan. This is called a personal guaranty (PG).
Basically, a PG means that, if the company doesn’t pay the bill, you’ll be responsible for the debt. It doesn’t matter that the money was intended for business purposes. If you sign a PG, you’ll be on the hook for the money if the company doesn’t pay.
Years ago, people didn’t mind signing a PG. They figured their business would be around forever and there was no risk in signing a guaranty. Now, with businesses closing their doors every day, there’s a much greater risk of your being held liable for the monies owed.
Why Do Banks Demand a PG?
When you apply for a company loan, the bank is going to look at your business assets. They’ll also pull a credit report on the business. This is similar to a personal credit report, but it pertains to the business’ repayment history on other loans and liabilities.
The bank is also going to look at other factors in deciding whether to lend your company money. Some of these factors include:
- How long your company has been in business
- Your annual revenue
- Other outstanding loans and debts
- Whether there are any liens against the company
- The likelihood that the company will be in business for the life of the loan
- Your company’s history of repaying their bills and obligations
- Your cash flow and liquid assets
If the bank doesn’t believe the company is a good risk, they may ask for a PG. Usually, this is the owner or the business. However, there are times when a manager may be asked to sign the PG instead.
What if the Company Goes Under or Files Bankruptcy?
If the company doesn’t pay back the loan or credit card, the bank is going to pursue the PG. This happens all the time when a business closes or files bankruptcy. The first person the bank is going to call is the person who cosigned for the loan.
If this happens, the PG will be responsible for the entire debt. It doesn’t matter what the loan was for. The fact that you signed as a PG is all the bank needs. They can even sue you personally for the money owed.
Because you will be on the hook for the loan, you want to talk to an experienced business lawyer in Connecticut at Aeton Law Partners before you sign a PG. They can advise you whether or not it’s a good idea or if shopping around for another source of funds is a better option.