Who Acts As A Guarantor In A Business Loan? A Detailed Legal Advice Before You Become a Loan Guarantor!
Becoming a loan guarantor is a huge responsibility. Still, it's important to understand the legal implications of becoming a guarantor before you sign on the dotted line.
So, What does guaranteeing a loan mean? This blog post will detail who can act as a guarantor on a business loan, their responsibilities, and the legal implications of becoming one.
Definition of a Loan Guarantor
Who is a loan guarantor?
A guarantor is an individual or entity that agrees to be held liable for the debt of another if they default on their loan. In other words, if the borrower does not repay their loan, the guarantor will be responsible for repaying it, because he was the one who gave a personal guarantee.
What Is The Role Of A Guarantor?
The guarantor's role is to provide personal guarantees for the loan. This means they are responsible for repaying the loan if the borrower or his business defaults.
The guarantor may also be required to make loan payments if the borrower (which in this case, is the corporate entity that borrows the loan) cannot do so. In some cases, the guarantor may be responsible for the entire loan amount if the borrower defaults and the business debt is all on the personal liability of the guarantor.
Joint And Several Guarantee
When a business takes out a loan from a bank, the bank will often require some form of personal guarantee from the owners or principals of the company. This guarantee ensures that the bank will be able to recover at least some of its losses if the company fails and is unable to repay the loan.
There are several types of personal guarantees that a bank might require. The most common is a joint and several guarantee, which means that all of the guarantors are jointly and severally liable for the debt. This means that the bank can pursue any one of the guarantors for repayment, and that the guarantors are all responsible for repaying the entire debt if one of them fails to do so.
A bank will typically enforce a personal guarantee by seizing the assets of the guarantor or by suing them for repayment. If the guarantor has insufficient assets to cover the debt, the bank may also seek to recover money from any other parties who may be responsible for repayment, such as the company itself or other shareholders.
Joint and Several Guarantee is often used by Financial Institutions in Singapore for any unsecured business term loan agreement.
Why Banks Need Personal Guarantees (PG) When Is An Unsecured Business Term Loan?
An unsecured business term loan is a loan that is not backed by any collateral. This type of loan is typically only available to businesses that have a strong credit history and good financial standing. Businesses that are new or have a poor credit history are typically not eligible for unsecured loans.
When a business applies for a loan, the bank will typically require some form of collateral to reduce their risk. If the business is unable to repay the loan, the bank can seize the collateral to cover the debt.
However, not all businesses have assets that can be used as collateral. In these cases, the bank may require a personal guarantee from the owner or shareholders of the business. A personal guarantee is a promise by the business owner to repay the loan if the business fails. This guarantees the bank that they will be able to recover at least some of their losses even if the business goes bankrupt.
Singapore offers a number of advantages for businesses, including limited liability company formation and exemption from audited financial statements for certain SMEs. These benefits make it easier for businesses to get started but at the same time, this makes it harder for Banks to do their credit assessment throughly thus the need for Personal Guarantee on their unsecured business term loan offering
Rights of a Guarantor
As a guarantor, you have certain rights that are mentioned below:
- The right to be informed: You have the right to be fully informed about the loan agreement before you sign it. This includes information about the terms and conditions of the loan and the borrower's ability to repay it.
- The right to refuse: You have the right to refuse to become a guarantor if you do not agree with the terms of the loan or if you do not feel comfortable with the responsibility.
- The right to withdraw: You have the right to withdraw from your role as a guarantor at any time before the loan is repaid in full. However, you may still be liable for the debt if the borrower defaults.
- The right to compensation: You have the right to receive compensation for any losses you incur due to becoming a guarantor. This includes any money you must pay if the borrower defaults on their loan.
Note the term 'Borrower' here is the corporate entity that took an Unsecured Business Term Loan
Legal Implications Of Being A Guarantor: Consequeces Of Becoming A Guarantor
Certain legal implications come with being a guarantor. These are mentioned below:
You may be held liable for the debt if the borrower defaults: If the borrower does not repay their loan, you may be held liable for the debt. This means you will be responsible for repaying the loan in full.
Your credit score may be affected: If the borrower does not make their loan payments on time, your personal credit score and personal credit relationship with the relevant banks may be negatively affected.
You may be sued: If the borrower does not repay their loan, the lender may sue you for the debt.
Becoming a guarantor is a big responsibility and should not be taken lightly. You should only become a guarantor if you are confident in the your company (borrower's) ability to repay the loan and are comfortable with the risks involved.
Who Can Be A Guarantor For An Unsecured Business Term Loan?
Often, Banks will only take in Directors' and Shareholderss of the company to be a personal guarantor for the loan and case by case basis, most banks will require more than 50% of the shareholders to come in as guarantors for the loan
Who can be my guarantor? Remember that a person must meet certain eligibility criteria to become a guarantor. These are mentioned below:
- The guarantor must be 21 years of age or older.
- He must be a citizen or permanent resident.
- The guarantor must have a good credit history.
- A stable source of income is mandatory. (At least >$30,000 Annual Income)
- The guarantor must not have any outstanding Litigation or Bankrupcty charges filed against him/her.
Frequently Asked Questions (FAQs)
How To Remove Yourself From Being A Guarantor For A Business Loan?
Removing yourself from a guarantor are not as straightforward as you think but there's are a few scenario where you can remove yourself as guarantor for the loan
You have decided to sell your company to a third-party or you have sold majority of your company shares to an investor/buyer (reduce to <5% shareholding)
Depending on the buyer's financial standing and personal credit rating, banks might accept or reject the request to replace yourself as guarantor for the loan with the new owner or if you can convince the banks that you are no longer the keyman for the business.
Since Government Assisted Loan Such As Working Capital Loan provides a 70% risk sharing with Enterprise Singapore, is the business responsible for Only 30% of the remaining percentage of the loan even if the directors' sign a PG?
We wish too! But sadly, borrower and guarantors are responsible to repay 100% of the loan amount.
In the event of default, Participating Financial Institutions are obligated to follow their standard commercial recovery procedure, including the effect of the personal guarantee (which means PFIs will foreclose, auction off any valuable assets of the company and guarantors), before they make a claim against Enterprise Singapore for the unrecovered amount in proportion to risk-share.
What Happens If Your Guarantor Dies?
Can a Company Be a Corporate Guarantor?
In Singapore if a sole guarantor dies, family members are generally not legally responsible for the debts left behind by the deceased. According to section 57 of the Probate and Adminstrator Act, if the deceased's estate is solvent, which means that his assets are more than his liabilities, the executor may use his estate to settle his/her debts.But if there are more than one guarantor e.g. 2 directors coming in as Personal Guarantor for the unsecured business term loan, in this case the surviving guarantor will assume and continue the repayment of the debt
If the estate is deemed insolvent, the debts will have to be written off.
Yes, a company can be a guarantor for most unsecured business loans. The company would need to provide financial statements and other documentation to the lender to show that it can repay the debt if the borrower defaults on the loan.
Usually in this case, the shareholding structure of the borrowing corporate entity includes other corporate entity as shareholders. Banks may also request the ultimate owner of the corporate entity to comes in as Personal Guarantor for the business loan.
Business loans can be a great way to finance your business, but they can also be risky.
If you're thinking about taking out a business loan, it's important to understand the potential risks and rewards involved. One of the biggest risks is becoming a guarantor on a loan. As a guarantor, you're responsible for repaying the debt if the borrower defaults on their loan. This can have a major impact on your finances and your credit score. Before you become a guarantor, ensure you understand the risks and rewards involved.
Read also: What Happens When You Default on a SME Business Loan?
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