Personal guarantee
A personal guarantee is an owner’s promise to repay a company’s debt from personal assets if the company cannot. Warehouse and credit facility providers commonly require one from a lending company’s major owners.
How a personal guarantee works
The guarantor signs a separate agreement promising to pay what the company owes the provider. A full (unlimited) guarantee covers the whole debt; a limited guarantee caps the amount; a “bad boy” or carve-out guarantee applies only if specified acts occur, such as fraud or an unauthorized transfer of collateral. Many guarantees also require the guarantor to keep a minimum net worth and liquidity and to provide personal financial statements.
Requiring them is common practice. Federal Reserve researchers quote an industry presentation: “most warehouse lenders require major shareholders of non-public companies to guaranty obligations.” One bank’s published warehouse program requires personal guarantees from any individual owning 10% or more of the company.
Why it matters to a private lender
A guarantee puts the owners’ personal balance sheets behind the company’s loans. If the line is called and the collateral sells for less than the advance, the provider can pursue the guarantors for the shortfall. It can also affect your ability to guarantee other debt, and your partners and spouses may need to sign or consent.
Example
Hypothetical. Two owners each hold 50% of a lending company and sign full guarantees on a $10,000,000 line. After defaults, the provider sells collateral and is $600,000 short. It can seek that $600,000 from either owner.
Whole-loan funding involves no facility to guarantee; see the warehouse line alternative. Ask counsel before signing any guarantee.
Sources
- Kim, Laufer, Pence, Stanton and Wallace, “Liquidity Crises in the Mortgage Market,” Federal Reserve Board FEDS 2018-016 (warehouse lines as repurchase agreements, mark-to-market margin calls, covenants, guarantees, 364-day terms)
- Simmons Bank, Warehouse Lending (an example bank program: eligible and ineligible products, personal guarantees from 10% owners, per-file fees)
Where Lender Capital fits
Lender Capital places first-lien, business-purpose real estate loans with capital partners. You apply once, then submit each loan with the full file. We send it only to capital partners whose criteria it fits, one partner funds the whole loan at closing and it is assigned to them. You keep your points (less the placement fee), earn the spread above the partner’s rate and service the loan. You pay a placement fee only when a loan funds.
Lender Capital is a business-to-business platform. This page is general information, not legal, tax or securities advice. Terms of warehouse lines and other funding sources vary by provider; confirm them with each provider and your counsel.