In a borrower’s ideal world, the corporate borrower has leverage to negotiate for no personal guarantees of its loan. However, more often than not, bank policy or regulation will dictate that the principals of the corporate borrower are called upon to jointly and severally offer up their personal guarantees of the borrower’s payment and performance under the loan. But what form that guarantee takes may be a subject of negotiation.
Most common is an absolute or unconditional guarantee of the borrower’s payment and performance which permits the lender to seek immediate and direct recourse against the guarantor or guarantors should the borrower fail to perform as agreed, whether that failure involves non-payment or a default upon some other covenant. Generally, these are written as continuing guarantees so as to be applicable to multiple defaults on the part of the borrower and remaining in effect over the life of the loan.
There is also a wide variety of limitations which can be negotiated into guarantee agreements. A guarantee can be only as to payment, such that recourse to the guarantor would only occur as a consequence of a failed payment and not due to other covenant defaults. Similarly, a guarantee can be limited as to amount or duration. For example the guarantor’s contingent liability could be capped at a particular dollar amount, or expressly provided to expire upon the underlying indebtedness being reduced below a certain figure, or to expire within a set period of time short of the ultimate maturity of the loan. And guarantees may be limited to recourse to particular collateral pledged by the guarantor to secure the borrower’s obligations.
No borrower enters into a commercial loan expecting to default. However, knowing and negotiating the nuances of the personal guarantees of the loan up front can make a world of difference should the unanticipated occur. Be sure to consult with legal counsel as to individual guarantee options prior to signing a commitment letter.