You’re asked to guarantee someone else’s business.

A request for one signature could create a major personal obligation

A friend asks an office worker to guarantee finance for a new takeaway shop. The friend says the bank only needs an extra signature and that the business will cover every payment. The proposed guarantor has never seen the accounts or lease. Before deciding, the person needs information independent of the borrower’s enthusiasm.

Ask why a guarantee is needed

Request the loan purpose, amount, repayment terms and reason the lender seeks support. Obtain the business plan, recent accounts if available and evidence behind projected sales.

Moneysmart recommends independent accounting and legal advice for business guarantees. The borrower’s confidence is not a substitute for understanding whether the venture can support its obligations.

Source: Moneysmart — Going guarantor on a loan

Read the complete personal commitment

Have the guarantee, indemnity and any security explained in plain language. Ask about limits, future debt, interest, costs, default and release. Identify the assets that could be affected.

Do not sign a summary page on the understanding that the detailed terms can be read later. Ensure the document explained to you is the final version you are asked to sign.

Test your own worst-case position

Prepare a personal budget assuming the borrower cannot contribute. Consider existing loans, dependants, housing and other guarantees. Ask how long any required payments could be sustained.

Do not rely on the borrower promising to reimburse you immediately if the lender calls. The same financial problem that causes default may prevent that reimbursement.

Decide without pressure

Take time for independent advice and say clearly if you do not wish to proceed. Consider other forms of support only after assessing their cost and risk.

If you do proceed, retain the signed documents and understand what information and review arrangements are available. A guarantee should not become an invisible obligation simply because the friendship remains strong.

Make the decision from evidence and independent advice

Request the business and finance evidence before deciding.

Obtain independent legal and financial advice.

Assess your ability to bear the loss, not just the borrower’s optimism.

Call CRP today to coordinate appropriate advice before you guarantee someone else’s business.