A personal guarantee is a promise by the owner to repay the business’s loan if the business cannot. Banks, credit unions and private lenders all require them from the principals of owner-managed companies. It is not a sign of distrust; it is a recognition that the owner controls the outcome.
What it does
- Aligns the owner’s interest with repayment
- Allows the lender to pursue the guarantor personally if the business defaults
- Supports the loan where the business entity is new or thinly capitalized
What it does not do
A guarantee is not a mortgage on your house unless you also sign one. It is a personal promise to pay. Most Canadian guarantees are drafted so the lender can call on the guarantor as soon as the business defaults, without first selling the business collateral, although in practice lenders usually look to the business assets first. Some lenders will limit the guarantee to a dollar amount or a percentage of the loan, and lenders commonly require independent legal advice before a spouse or other family member signs. Alberta’s Guarantees Acknowledgment Act requires a guarantee by an individual to be acknowledged before a notary public, which in practice means a lawyer, for it to be enforceable.
How to negotiate it
- Ask for a limited guarantee tied to the loan amount rather than unlimited
- Negotiate a release or reduction once the loan has performed for a set period
- Keep guarantees specific to each facility rather than cross-guaranteeing everything
- Get independent legal advice; the lender will expect it and so should you
Have a situation like this? Tell us about the deal and a principal will respond within two business days. Cascade lends to businesses only, in Canadian dollars, and every rate we quote is an annual rate.
