Personal Guarantees – do I really need to provide one?

If you have never had a commercial mortgage or business loan or have had very few, providing a personal guarantee may be something that you are naturally uncomfortable to do. However, non-recourse mortgages and loans where a bank or lender agrees to provide you with money and not ask for a personal guarantee are hard to come by. The trade off usually ends up being that a bank or lender may charge significantly higher interest rates and/or fees to have the personal guarantee requirement removed as a condition of financing. The general rational for having a borrower provide a personal guarantee is that a bank or lender is not able to profit from a mortgage or loan they provide to you. A bank or lender can earn interest and can charge fees but cannot participate in the profit. As a result, a bank will look to limit their risk by requiring the borrower (who does have the opportunity to earn profit) to provide their personal guarantee to ensure that the mortgage or loan will be taken care of. Without a personal guarantee a borrower would lack the motivation to ensure that a mortgage or loan was repaid. Without a personal guarantee, banks and lenders would not need borrowers but rather managers to manage their investments. Borrowers have an interest in making sure that a mortgage or loan is repaid and their motivation is profit and avoiding the legal ramifications of not repaying a mortgage or loan.

Every deal is unique and there is not a “one size fits all” answer to each deal. If you are concerned about providing a personal guarantee it may give you the chance to re-visit the opportunity to determine if the profit is worth the risk that a bank or lender may look to recover their money from your personal guarantee. As well, there are programs for small businesses that involve government sponsored loans provided by a bank or lender.

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