How Tough Personal Guaranty Clauses May Affect You
Few staffing agency owners understand the personal guarantees included in all payroll funding contracts. The following items are seldom understood in the toughest of guarantees (commonly those of banks and bank-owned funding companies in funding-money only programs):
Most guarantees require joint and several liabilities, which means that each individual who signs the guarantee can be held responsible for the
whole amount of the loan. Even if someone is only a 7% owner, that person is personally liable for 100% of the amount guaranteed. The guarantors can be sued individually or all together. The bank or lender can pursue whoever has assets, and the most liquid assets. Note legal clauses that permit the lender to release security and guarantors. This allows the lender to deal with other guarantors as the lender deems necessary, which could have impact on the remaining guarantors.
The total dollar amount of the guaranty may not be limited to the principal amount. Interest costs and costs associated with collection can be added to this dollar amount.
The liability of the guarantor can be binding on heirs, successors, or parties that take over the obligations of the guarantor.
If the guarantor is not involved in the day-to-day operations of the company, he/she should be aware that a “continuing” guaranty binds that party or parties to future debt negotiated by the borrowing entity (business). The guaranty may cover all the renewals of notes, extensions, substitutions and modifications of the note.
A provision may permit the lender to determine when and how to apply payments received, which could be important if there are several notes and if the guarantors are not uniformly liable on all notes.
As a guarantor, you guaranty the debt of a primary debtor (the staffing business). The primary debtor (the business) does not always have to refuse to pay, nor does the lender have to exhaust its remedies (efforts at collection) against the primary debtor (the business) for the guarantor to be liable for the debt. In other words, the funder could decide to pursue you rather than being required to assemble and sell your business assets first, or even at all. There may be no requirement that before the guarantor can be held responsible the lender must show that the borrower actually named in the loan document (the business) is unable to pay the loan.
Always read the fine print, especially in tough bank guarantees. Of interest is a true-life story about a personal guaranty. A man had a successful business for many years. The business eventually ran into trouble and defaulted on the loan causing the bank to enforce his personal guaranty and take everything.
He started over in life and after a few years started a new business. Eventually it succeeded. Years later (when he thought the earlier guaranty was all ancient history) the man’s wife died and major assets were transferred by will/inheritance to him. The bank got wind of it and, enforcing the guaranty from years back, immediately swooped in on his assets, leaving him financially insecure in retirement.