Most business owners have a line of credit with the bank but don’t realize that, as the business owner, they may be personally responsible for repaying any monies loaned. Often, especially in uncertain financial times, the bank will want someone to guarantee a line they might not otherwise make — usually the officer of the borrowing company. As the business owner, the bank may ask you to personally guarantee a line of credit for your company.
Unlike a traditional loan, which requires you to borrow the face amount of the loan and begin repayment of interest and principal, a line of credit requires you to repay only the amount you borrowed plus any added interest. If you don’t borrow, there’s nothing to repay. When it comes to unexpected expenses and opportunities, a line of credit provides a loan at the ready.
The borrower on a business line of credit is usually the business entity. If corporate, then the corporation is the borrower. The note contains all of the terms of the loan, i.e. amount of loan, interest rate, and more.
When Do You Need to Repay a Line of Credit
In addition to non-payment of the interest or principal owed, there are other ways to trigger repayment of the loan, This may include defaulting on other loan agreements with the lender, winding down business operations, litigation, and more.
The bank must give you notice of the borrower’s default in payment and the fact that you, as the guarantor, are put “on notice.”
A default in repayment could trigger an acceleration of the balance owed together with costs, interest, and additional “default interest.” Because the borrower missed a payment, you are now indebted and liable to the bank for the loan amount plus interest as well as late charges, additional default interest at a pre-determined amount, and often bank attorneys’ fees or costs of collection.
The possible loan contemplated by securing a line of credit “just in case” could end up costing the business borrower and the guarantor far more than either may have anticipated.
Being Pursued as the Guarantor
It’s important to understand your legal rights and options if you are being pursued as a guarantor of a business line of credit. Seek advice from a firm with experience handling these types of matters from both sides.
Will you need to repay the loan, interest, costs, attorney fees, and more? There are plenty of situations where a lender may accept less than the amount owed. The bank may consider the viability of the business borrower and how likely it is to repay the entire amount. Can the guarantor afford to repay the loan given the business’ age and financial projections? For example, is the business borrower winding down operations or closed, defunct, and assetless? Is the guarantor flush with cash or investments or are all monies and assets belonging to the guarantor exempt from judgment enforcement? The right legal advisor should understand how to advise you based on their personal experience with lenders and borrowers.
If you are being pursued because you guaranteed a line of credit and want experienced guidance and representation, contact Frank, Frank, Goldstein & Nager for a consultation.