When a business borrows money, especially when it’s a new business, the lender wants to make sure it will be repaid even if the business fails. The lender often asks for additional security that it will be paid. Additional security can be the personal guaranty of the owner, a deed of trust on real estate or a lien on personal property. It is important for business owners to understand what they are signing when they borrow money.
Personal guaranties are contracts in which the shareholders, members or partners agree to be responsible for payment of the company’s debt. Guaranties may allow the lender to seek payment directly from any individual guarantor without having to ask everyone or sue the company/debtor. In that case, the guarantor may sue the other guarantors for their contribution to paying off the debt.
Deed of Trust
In a real estate deal, the lender is often secured by a deed of trust, which allows the lender to foreclose on the property if the company/debtor defaults. This may be the sole remedy of the lender, or the lender could also sue the company for any deficiency after the commercial foreclosure sale. It is possible for the owners to be asked to sign personal guaranties as well as granting a deed of trust.
Finally, if the business has equipment, inventory, accounts receivable and similar personal property, the lender may ask for these assets to be pledged. The lender will file a UCC financing statement with the Secretary of State to give notice that the assets are pledged. If the debtor defaults, these assets can be seized and sold to pay off the debt. The business or its assets cannot be sold free and clear until the loan is paid and the UCC lien released.