Lenders are in the business of making money by lending money to businesses and individuals. This means that they need to be very sure that they will be repaid the loan and interest from each lending transaction.
The reality is that every time they loan money, they risk losing it. The future is unpredictable and there is no guarantee that the borrower’s circumstances won’t change (they could lose their job or the business could fail).
One of the ways lenders can lessen the risk of lending money is to insist that business owners or individuals borrow money and provide surety for the loan. Surety is a third party who promises to pay the money back even if the business or individual goes into bankruptcy; it is a guarantee. The common terminology used by the financial sector is to say that someone “stands surety” for the loan.
All the lender wants to know is that they are guaranteed not to lose the money (and interest) that they lend you. You have a few options to choose from in order to provide surety for the loan:
This document is going to discuss the extremely broad powers that the lender has over your assets if you sign personal surety. Please read ahead to make sure you fully understand the consequences of signing personal Surety and, if at all possible, avoid signing these documents.
Personal Surety documents are legal documents full of terms that can be confusing to the layman. So, we are going to start off by explaining some of the key terms you are likely to encounter in a personal surety document.
You might have business partners, where more than one of you owns the business. In this case, the lender will make certain that the surety is signed by yourself and your business partners. Joint surety is designed in such a way that all of the business owners are “jointly and severally liable” in their personal capacity. This means that if the business doesn't pay back the loan, the lender can come after any or all of the business owners to claim back the full amount owed by the business.
The real snag here, is that each partner is signing surety for the FULL amount of the loan plus interest and administrative costs. This gives the lender the right to decide whether to claim the amount from all partners or from an individual partner, irrespective of their shareholding in the company.
It pays to remember that business is not about emotions. As a result, the lender will look to find the easiest and most cost-effective way to recover the money. This means they will attach the assets that are the easiest and simplest to sell.
To summarise, the term "jointly and severally" allows the lender to go after the partner who is most accessible and who can pay back the loan with the least legal complications.
This strange word means that the lender must first try to get their money back from the principle debtor (that is, the business or person who signed the loan agreement) before they can turn to you to honour the debt. So essentially, the lender must attach and sell the business assets before they can attach and sell your personal assets.
However, a standard personal surety contract will generally have a clause in it that says: If your business fails to repay the loan, the lender can get the money back from you and furthermore, the lender can do this is in whatever way is easiest for them. In other words, the lender doesn’t have to first try to recover the money from your business assets, they can go directly to your personal assets. That means that they can take away your house first if that is the easiest way to recover their money! In legal terms, you sign away the rights to the “benefits of excussion”.
Generally, in South Africa, personal surety contracts are unlimited. This means that the surety applies to the specific finance contract you have negotiated AND any future money you or the business (in the case of a business loan) might owe that lender.
The surety is considered unlimited (in relation to time)—meaning it never ends—even when you have completely paid back the lender.
Did you know that unlimited personal surety means that you are FOREVER responsible for repaying the debts of the company even if you sell the company!
So the key message is: Refuse to sign unlimited surety agreements. If you have to sign personal surety for a loan, then make sure that the surety is limited to that specific loan and is cancelled when the money for the loan has been repaid.
The reality is that for most business owners, if they want the money, they are going to have to sign for personal surety. Here are some tips on how to minimise your risk. If you are considering signing personal surety, make sure you have a professional adviser look over the document and help you set limits that protect you and your assets.
Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service we are not required to be a registered finance provider as we do not loan money directly.