Personal and Corporate Guaranties:
What Do They Really Mean and What Should You Really Worry About?

When it comes to financing the acquisition of equipment, starting a new diagnostic imaging center, or borrowing money for working capital purposes, the subject of guaranties invariably arises. For the most part, the concerns and questions revolve around personal guaranties, but corporate guaranties are often at issue as well. This article is intended to provide you with some practical thoughts, meanings, and advice about guarantiesboth personal and corporate.

However, before jumping right into guaranties, what they mean and how to deal with them, it is important to review what a borrower is and what a lender is.

A borrower, in general, is fairly straightforward: it is typically some sort of legal entity owned by one or more people and/or one or more corporate entities that has been created to start a new business or buy equipment or some other business-related venture. The borrower, or borrowing entity, is, by definition, the primary guarantor of the money being borrowed ("debt"). As a result, many borrowing entities have been created to keep the guaranty at that level and minimize the financial liability of the equity owners of the borrowerwhether they are individuals or corporate entities.

A lender, which can be a bank, an independent third-party leasing company, or a manufacturer's finance company, assesses risk and loans money. The lender assesses the risks inherent in a given borrower by assessing the borrower's current business operations and financial results, as well as its business plan or whatever the vehicle is that is used to describe what they want the money for and, of course, how much. The "what" can be starting a new business practice, buying equipment, acquiring another practice or business, and any one of a number of other purposes. The "how much" is always important and is typically stated as part of a budget presentation. Once that risk assessment is complete, then the lender will tell the borrower how much money they will lend, at what price, and under what terms and conditions.

There is usually a term sheet that precedes this assessment, and the lender will generally do their best to meet the terms and conditions as outlined in the original term sheet by the lender's salesperson. It is not unusual, however, that circumstances change or something cannot be proven and that the terms and conditions, as well as pricing, change in the end. Lenders, be assured, full well know that borrowers want to minimize guaranties, particularly, but not exclusively, personal guaranties.

What follows are the nine most frequently asked questions about guaranties - and answers.

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