Often, loans to an entity such as an LLC or Corporation are personally guaranteed by an owner or owners of the entity. Personal guaranties are used by lenders because otherwise the owners of the LLC would avoid personal liability.
A guarantor is “one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefor.” CC §2787. Lenders often request guaranties from interested third parties (e.g., the borrower’s principals or affiliates) as added assurance for repayment of the debt and for performance of the borrower’s related obligations under the loan. The scope of a guaranty can range from a comprehensive guaranty of payment (including interest installments, the entire outstanding principal, and all other charges against the property, such as property taxes) to a mere affirmation of personal liability for certain limited exceptions to an otherwise non-recourse loan.
A guaranty is a common form of credit enhancement. Although guaranties are a valuable tool for both lender and borrower in procuring the most attractive loan from an economic standpoint, they expose both parties to substantial risks and should be carefully analyzed and negotiated as fully as circumstances permit.