When seeking a loan for your business, many banks will also require you personally to guarantee the company\u2019s obligations. This can have profound effects, especially if your company defaults. Therefore, understanding the legal and commercial implications of entering a guarantee agreement is helpful. This article will explain how the law behind guarantee agreements operates. <\/p>\n\n\n\n
The bank cannot chase a company’s owners if it does not have enough assets to repay a loan<\/a>. The exception is if it can get the company\u2019s owners to agree to promise that if the company fails to meet its loan obligations, the owner will meet the obligation instead. This is called a guarantee agreement. <\/p>\n\n\n\n Guarantee agreements are a kind of \u201cquasi-security\u201d which banks use to mitigate their risk. However, such agreements do not include the right to take hold of the company\u2019s property and sell it to settle any debt.<\/p>\n<\/div>\n\n\n\n There are three parties in a guarantee agreement, including the:<\/p>\n\n\n\n While a loan is an agreement between your company and its bank, the guarantee agreement is a separate contract between you and the lender. If you enter into a guarantee agreement with your company\u2019s bank, the law refers to you as the \u201cguarantor\u201d.<\/p>\n\n\n\n Because the guarantee agreement creates a second contract between you and the lender, if the company breaches the loan terms<\/a>, the lender has a right to come to demand payment from you. If you refuse, the lender can sue you in your capacity.<\/p>\n\n\n\n This is important because a business owner is usually not liable for the company’s debts. However, the guarantee agreement creates a separate legal mechanism the bank can use to recover its money.<\/p>\n\n\n\n Therefore, you should not enter into a guarantee agreement unless you are reasonably confident that either:<\/p>\n\n\n\n\n
Implications of Being a Guarantor <\/h2>\n\n\n\n
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