In my previous post, I discussed various documents that are part of the lender’s collection of documents for a private lending arrangement. One of the documents I listed was a Personal Guaranty. Many investors do not understand what this document is and the power it possesses.
In many private lending arrangements, money is being lent to an entity. For the lender to feel more secure, they want one or more principals behind that entity (usually a small, family-owned LLC) to personally guarantee the note. That is done by signing a separate document called a Personal Guaranty. A well-written Personal Guaranty means that all the current assets and income of the guarantor, as well as future income and acquired assets, are available should the lender need to go after them to satisfy the full payment on the Promissory Note. Please read that sentence again.
I have seen instances in which banks have used a Personal Guaranty to chase borrowers for years after the default because they believe that borrower still had assets or income-earning potential, and they want to be made whole on a Note that had been previously defaulted.
I have also seen investors who thought that since they had borrowed in the name of their LLC and had signed the Note on behalf of the LLC in their capacity as Manager, they did not have any personal liability even though they had signed a Personal Guaranty. I’m not sure where they got that misinformation, but I have had to inform them otherwise.
When you consider the powerful reach of the terms of a Personal Guaranty, you can understand why lenders want that document signed, and you can understand why a wise borrower would think twice before signing such a powerful and potentially dangerous document.