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How to negotiate a Guarantee Agreement
| Guest post by: Michael Smyth |
Article Overview: “Never sign a guarantee agreement” is the mantra of most lawyers. However, in most situations that is simply not practical. Banks and larger lending institutions can be pretty reluctant to waive the requirement for a guarantee entirely. For some lenders, however, it may be possible to negotiate individual terms which reduce your liability. If that’s possible, here is a list of some of the things which you should focus on.
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Free Download - Download a template or see a lawyer? By Michael Smyth |
How to negotiate a Guarantee Agreement
Limit
your liability
If your intent is to limit your exposure
under the guarantee agreement to a fixed amount then you must make sure the
agreement is drafted to give you that limitation. You don’t want to find out later that you
have guaranteed a sum far greater than you first thought. Some guarantees will be “all monies owing”
guarantees which should be avoided if at all possible. These are common with revolving credit
facilities or where the amount of the loan fluctuates over time. If you can place a financial limit on your guarantee
then that places an upper limit on your exposure.
Guarantee
or indemnity?
Check whether you are giving a guarantee or
a guarantee and an indemnity. An
indemnity not only will require you to guarantee the money that is lent to the
borrower, but will also impose an obligation upon you to indemnify the lender
for any other loss or harm. With a
guarantee agreement you are only guaranteeing what is authorised under the main
loan agreement so if the lender breaches the terms of the loan agreement by
lending more, the guarantee may not extend to that excess amount loaned. An indemnity agreement however may extend
your exposure to unauthorised transactions under the loan account and will also
extend your liability to any collection costs which the lender incurs trying to
recover any money owed from the borrower.
It is important to understand this difference when you are guaranteeing
something for a third party.
Is
the guarantee joint and several?
If you and your co-director/shareholders
are being required to guarantee a loan to your company, then check whether the
guarantee is several or joint and several.
A several guarantee is where each director guarantees a proportion of
the debt. A joint and several guarantee
is where each director guarantees the whole debt, meaning the lender can come
after all, or just one, of the directors (and usually the one with the most
money). A several guarantee is better
but may not be acceptable to the lender.
If it has to be a joint and several guarantee, then make sure that there
is an agreement between you and your co-director/shareholders to indemnify each
other so that whoever the lender pursues, each Director/Shareholder’s liability
is ultimately only up to their proportion of their shareholding in the company.
Place
an end date on your liability
If you can limit your guarantee by
providing that claims may only be made against you before a certain time then
that gives you the certainty of knowing when you will be in the clear. Another option would be to give yourself the
right to terminate the agreement by giving a period of notice to the lender,
although you may struggle to get this accepted by the lender.
Allowances
made to the borrower
Make sure that the lender is not permitted
to give the borrower any allowances which enable the lender to come after you
for the balance. The borrower should
remain fully liable for the principal debt at all times.
Your
approval to variations
Where you are not in complete control of
the entity which is the borrower, make sure that the lender is not permitted to
make variations to the main loan agreement without your approval. Otherwise you could find yourself
guaranteeing more than you first thought.
Your
ability to negotiate
If you are going to negotiate with a lender
then it is important to bear in mind the strength of your negotiating power. If you are a long established customer of the
lender with a good trading history then your ability to negotiate will be much
better than someone who is a new company and a new customer to the lender. Ultimately, it is all about persuading the
lender that you present a low risk to them.
The lower the risk, the better your ability to negotiate. Your
ability to negotiate individual clauses will always be much higher than your
ability to negotiate dispensing with a guarantee agreement altogether and you
may want to engage the services of a professional, whether it be a lawyer or
someone else, to help you limit your liability.
If you can’t negotiate, then at least know what you are signing so there
are no surprises later on.
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Article Tags: banks, guarantee agreement, lenders, lending institutions
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About the Author: Michael Smyth RSS for Michael's articles - Visit Michael's website Click here to visit Michael's website   Why you need to get your legal agreements sorted for 2011 Why running your business is no different to running your car How to ensure your business becomes an asset not a liability Boundaries and standards why you need both in your business and how to set them Are your dreams of retiring on the sale proceeds of your business pie in the sky |
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