Yes, pun intended; I had to get your attention somehow, right?
If you have been involved in commercial lending in any capacity, you have probably come across the guaranty (in this post, I am using the terms “guaranty” and “guarantee” interchangeably, as both a noun and a verb, per Adams on Contract Drafting). In working with clients on issues where a guaranty is required, I have noticed some confusion about what is actually being given. Below is material to clear up the confusion.
According to dictionary.com a guaranty is a “warrant, pledge, or formal assurance given as security that another’s debt or obligation will be fulfilled.” The alternative definitions provided by dictionary.com provide that a guaranty can be something that is presented as security or a person who acts as guarantor.
A guarantee (or a guaranty) is promise by a person or a company to be responsible for another person or company’s debt. Here is a visual example:
There are a couple of types of guaranty:
An unconditional guaranty means that the person or company that signs it, the guarantor, “unconditionally guarantees payment to Lender of all amounts owing under the Note.” Some of the finer points:
- This guaranty remains in effect until the loan is paid in full.
- The guarantor must pay all amounts due under the Note when the lender makes written demand upon guarantor.
- The lender is not required to seek payment from any other source before demanding payment from guarantor.
This is another variant of the guarantee. With this instrument, the guarantor is agreeing to be individually liable for the debt. While an entity may be the actual borrower, the guarantor is agreeing that it will pay the debt if it not otherwise paid. Without the word “unconditional” added to it, this means that the lender may be required to seek payment from the borrower first before trying to recover directly against the guarantor.
The individual guarantee a common requirement when a new business is applying for a loan. Without any credit history, the lender requires additional security beyond the business’s promises to pay and the additional security is one or more individuals involved in the business agreeing to pay.
One example of the difference between an unconditional guarantee and a guarantee of payment found in comparing the SBA’s Form 148, the Unconditional Guarantee with the SBA’s Form 148L, the Unconditional Limited Guarantee.
The key point in this discussion is if you sign a personal guarantee, you the are putting your assets at risk to secure the loan. This is not uncommon but it is important to understand the effect of the personal or individual guarantee.