The most common complaint I hear from business clients is that they cannot find financing. Needless to say, most are elated when they receive loan approval. As a practical business matter, that approval comes with a pile of paper including:
- A resolution of the governing board for the business approving the loan and authorizing signatories – Keep a copy of this in your minute or record book, it is an official corporate record;
- A Loan Agreement;
- A Promissory Note;
- A Security Agreement; and
- Personal Guaranties of the Owners or Shareholders.
I can write a blog and book on each of these documents, but today I want to focus on Personal Guaranties.
Let’s start by agreeing that Personal Guaranties are a necessary part of the lending arrangement for small business today. As a business lawyer, I recognize that banks will not make loans without assurances and a way to ensure repayment. Clients generally assume that the Personal Guaranty is required and is limited to the amount of their investment in the business. Personal Guaranties ARE NOT limited automatically. Usually, they are joint and several.
A joint and several guaranty means that each party signing the guaranty is personally responsible for the whole amount due. So if the loan is for $1,000,000 and there are three owners, each owner can be sued for the full amount of $1,000,000, but the lender can only collect the amount once from any one or combination of the the three.
In order to be liable only for an owner’s proportionate share, the guaranty must be a limited guaranty, limiting recourse to a maximum amount or percentage.
To change the loan documents, an owner will need a productive relationship with the businesses bank and banker, and will need to specifically ask for limited recourse. Your business attorney can review the documents and help you negotiate a better deal. We recommend that small businesses find experienced business lawyers with the skills and knowledge to assist you with loan documents.
Please contact us if you have any questions.—-Rochelle Friedman Walk, Esq.