YOU GUARANTEED WHAT!?

There’s a good reason why Bank’s say you MUST see a lawyer before you sign a guarantee.
Simple. If the punter they lend money to doesn’t front up then they are coming after you. Make no bones about it.
So we’ll tell you all the bad things about that guarantee, and then you’ll probably sign it anyway. Because if you don’t – no money.
Most of the time things are vaguely in your control, at least. Your company wants some money to buy a property or a business, so you have to guarantee the loan or the bank won’t give you the money. Thats the reality.
What should you know about guarantees?
  1. All Obligations:
Under an “all obligations” guarantee you will be liable for anything and everything that your company owes to the bank, now or in the future. So you’d better know what the company is up to.
If you decide to sell some or all of the shares in the company, and you no longer control what the company is doing, it had better be good for its word because if it doesn’t pay up, you have to. In other words, if you sell the shares in your company, or if you owe the bank nothing any more, get rid if the guarantee.
  1. “Daisy Chain” effect:
That company you are guaranteeing – do you know if its guaranteeing anyone else’s loan? Because if it is, you will be too indirectly. Again, okay if you know all about the company. Not so good if you don’t.
  1. Joint and Several:
What if you’re not the only guarantor? Lets say there are two guarantors – you and your friend, the other director of the company. Its a pretty sure bet that the bank will have you signing up as “joint and several” guarantors. What that means is that each of you is up for the whole of the company’s debt, not just half.
As between you and your fellow director you may well have agreed to share half each. Hopefully you have signed a shareholders’ agreement saying so. But the bank doesn’t care about that. It just wants its money back if things turn sour. And it will take the path of least resistance to the money. If you’ve got lots of the stuff and your erstwhile friend doesn’t, expect a knock on the door from the bank seeking the whole lot, and it will be up to you to get half off your friend.
  1. Cross Guarantees:
If the bank requires other security before it will lend you anything, you might have to sign “cross guarantees”. Thats where everyone guarantees everyone else’s debt to the bank – you guarantee the company’s debt, the company guarantees your debt and your trust’s debt. And your other company’s debt, and so on. In other words, everything is on the line.
So there are some fundamental things to consider before you sign a guarantee:
  1. Are you pushing the boat out too far? Should you really be borrowing all that much? Is there a risk in doing what you are doing? If you can rationalise it, well, thats a commercial decision only you can make. Good luck.
  2. Should you chat very earnestly with the bank about limiting the guarantee, or in fact giving them less security than they say they need? Obviously this won’t work if you’re desperate, and running out of options or time. But sometimes you can explain to the bank that they already have enough security over property and other assets, so why do they need everything tied up with cross guarantees? Why can’t they keep things separate for each entity. Or will they agree to limit your guarantee to a certain amount, maybe the debt plus any outstanding interest and any costs.
  3. Can you get the bank to agree that you and your fellow director only guarantee half each. Good luck with that, but it is worth a shot. It will be up to the bank, but there are times when it will work, usually when the bank is confident not just in the company, but each of the guarantors individually. Or sometimes if the bank just simply has to have you on board as a customer.
Following on from that you might even decide to take a more strategic approach to your borrowing. Should you really have everything tied up with one bank? Its not uncommon for a property investment company, for example, to use a different bank for each separate investment. That way, even if you have to guarantee for each bank, each debt is isolated from the others.
Being guarantor of a loan for your own company or trust is one thing. But why would anyone even think about guaranteeing someone else’s loan? To me that is madness.
Parent guarantors
Okay, I get it if you are parents and you’re trying to help your own child buy that first home. Its not easy. But even then there are some things you should be aware of. How well do you know your child now? Are they good with money?
Most people have confidence in their own kids but not necessarily who they shack up with. Is that relationship solid? What if your child’s partner walks out, yet he or she was the main breadwinner? How are you looking now? If you have doubts, think again. Remember too that if you use the same bank yourself, by guaranteeing their loan your home is probably on the line as well.
Why would you?
If you’re just trying to help out a friend by providing a guarantee, my answer is simple and clear. Don’t do it. There is a line and I’m afraid that is going above and beyond in my view.
If they have to get you to provide a guarantee just to get the loan they are probably in trouble already. And as guarantor you need to know that there is little obligation on the bank to keep you informed of the situation, and you can rest assured that your borrower friend could “fabricate” things. You will be the last to know if things are not going well. Don’t go there.
So you can see why the bank wants you to see a lawyer. They want you to know all this, right. Yes they do. But more than that. They are going to loan you some money now. And if things turn bad they want to be able to stand up in court and say you knew exactly what you were doing so they can get their money back. You’ve been warned.
Make sure you email russell@queenstownlaw.co.nz or call on 03 4500000