The Dangers of a Personal Guarantee
Have you ever been asked to sign a guarantee? It can come up in many situations.
If you are running a business, you might be asked to provide a personal guarantee of the lease or a trading account, or a guarantee of a business loan.
As an individual, you might be asked to guarantee a home loan for one of your children to let them get their first home, or to help them start their own business.
You should always be very careful to consider whether to grant a personal guarantee. By signing a guarantee, you might be risking all of your own assets.
A guarantee states that you will guarantee the performance of an obligation of someone else (be it your child, your business or a company or other entity) pursuant to a contract that other party might have. If they don’t meet that obligation, you may be forced to meet it for them.
A guarantee can also tie up your assets- for example you may not be able to finance your home if it is already being used as security because of a guarantee you provided for your children.
If you are asked to sign a guarantee, always:
- Get legal and accounting advice about the documents you are being asked to sign;
- Consider whether there may be some other thing you can do to avoid signing the guarantee at all;
- If you do have to sign the guarantee, see if the document can be limited in any way.
For example, if your child needs a guarantee to buy their first home, a guarantee may tie up hundreds of thousands of dollars of your equity if you are being asked to guarantee the whole of their loan. An alternative might be to lend them a much smaller sum so that they have sufficient funds to borrow without a guarantee. You may be able to secure that loan against the home they are buying, after the interest of the bank.
In other situations you may seek to negotiate that the guarantee is limited to a certain sum of money, or for a certain period of time in some instances.
A guarantee can lead to the loss of a large sum of money when you thought your assets were secure- always get good advice to make sure your exposure is as small as you can make it.
If you are pondering whether you should guarantee or not – contact our office and speak to a specialist now.
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