If you own an incorporated small business, a bank might ask you to guarantee a loan or credit card in your company’s name. The bank tells you the guarantee is standard practice, and nothing more. You wonder what is going on.
What is a personal guarantee?
Simply put, a personal guarantee is an agreement between you and the creditor of another person to repay a debt if that borrower fails to make payments. Signing the guarantee means you promise to use any assets you own to repay that debt.
Creditors (banks, landlords, private citizens) lend money. If they believe there is a risk the borrower might not repay it, the creditor may ask for a personal guarantee. The guarantee assures the creditor that they will get their money back, even if they have to get it from someone else. That someone is the person signing the guarantee.
Why would I agree to a personal guarantee?
The most common guarantees are by parents to children and by shareholders to an incorporated company. Other guarantees include ones between spouses on loans only in one spouse’s name.
People agree to be guarantors when they want the person asking for money to get the loan, credit card, mortgage, etc. Giving a personal guarantee carries risk because a failure to pay means your personal assets are at risk. Guarantors must trust the borrower they guarantee.
In Alberta a “Guarantee Acknowledgement Form” must be signed in front of a Notary Public to complete a personal guarantee. This protects guarantors from signing the guarantee without really understanding what it means.
What do I do if I am pressured to sign one?
Personal Guarantees must be freely given. Never agree to a guarantee if you are not comfortable with the request. Seek legal advice before agreeing to a guarantee.
If you have questions about personal guarantees, or any other legal issue, please book a
consultation with us.