
You want me to sign what?
The Guarantor
What is a guarantor?
In lay terms, a guarantor is a co-signer of a loan. The guarantor promises to pay a debt on behalf of another person if that other person fails to pay (defaults). Guarantors are commonly required by lenders in many commercial transactions, such as student loans and transactions involving real properties. When a lot of money is at stake, do not be surprised to see the lender require a guarantor.
A properly registered and licensed company is a legal entity that is treated just like another human being in the eyes of the law. Depending on how the business is set up, an owner may or may not be personally liable for the debts of the company. Even if the company is set up in a way that protects the individual assets of the owners, an owner or officer can still find themselves personally liable for a business debt owed by the company if they sign a contract as a guarantor of a debt owed by the company.
What does it mean for an owner or officer to be personally liable? In plain English, that means that the lender can sue the owner or officer as an individual and obtain a judgment against them that puts their individual assets (their house, their car, their furniture, etc.) at risk of being sold in order to pay back the debt.
The implications are serious and should not be taken lightly. If you own or are a partner in a business, you need to take the time to understand what it is you are getting into if you are asked to sign a contract as a guarantor. You need to think: how much could I potentially be sued for? What are the company’s resources for paying the debt? How does the company plan to pay this debt? Who else is guaranteeing the debt, and do they have the resources to pay it in the event that the company cannot?
These are just a few of the questions you should be asking yourself when analyzing a deal requiring you to be a guarantor. But a bigger question looms: can you trust the company or your business partners to pay the debts? If the answer is no, you should seriously reconsider guaranteeing any loan or obtaining a loan at all.
A friend of mine recounted a tale of woe where he ended up guaranteeing the debt of a company in which he was involved. I had to wonder how he got into the mess. What happened was that the business partner was a charming guy that had a lot of energy and ideas, but no practical business sense. The money borrowed went into producing a product that didn’t sell. When the time came to pay back the debt, there was no money and the partner had put the company’s assets at risk of foreclosure. Moreover, the partner had no assets of his own to put toward the company’s debt. My friend got left “holding the bag.”
Don’t let something like that happen to you. Take great care in selecting businesses and business partners. Be wary of partners with great ideas and no assets. Be especially wary if they have bad credit and cannot obtain a loan on behalf of the company. That is huge red flag.
Don’t put your assets at risk for things you don’t understand or marginally understand. If you need help understanding the contracts you are signing, you should consider hiring an attorney to help you sort through the contract terms and drafting contracts so that you as an individual and the company are protected to the maximum extent under the law.



