Guarantees and Indemnities; all lenders want them, some business owners will give them, some business owners are adamant they won't and some business owners will give them but don't necessarily understand what they mean.
There are several reasons why business owners have their businesses structured in certain ways. Two common reasons are; Tax Minimisation and Asset Protection. From a tax and legal liability perspective these structures may be beneficial to business owners; however, when it comes time for finance as they say in the banking game 'you don't get two bites of the cherry'.
Business and investment structures are often created to separate liability and remove the exposure a business owner may have between their business dealings and personal assets. The structures created by accountants and solicitors serve this purpose. For the purpose of borrowing money; most banks will require security (property; cash or other assets) in order to advance a loan.
Where the entity borrowing is the same as the entity that owns the security being offered this is referred to as 'First Party security'. Where the borrowing entity is different from the security asset owner this is referred to as 'Third Party security'. To use 'third party security' for a loan a Guarantee and Indemnity is used.
Example: The Guarantee type will vary depending on the owner of the security and their relationship to the borrower i.e Company ABC Pty Ltd is the borrower and the director of the company is the security asset owner or Company ABC Pty Ltd is the borrower and the security is being pledged by another company, with the same 'beneficial owners' or from a third party like a spouse who owns the assets but their partner is the director/owner of the company.
Lenders want security; it's their 'second way out' if the borrower can't repay the loan. Whilst business owner's legal advisors may recommend not to sign guarantees to the bank the simple fact is if you don't then don't expect to get a loan. This may sound harsh but from a lender's perspective it's simple; 'if you are not prepared to guarantee your business's debts, why should we take all the risk'.
Brian O'Shea, Principal of law firm Fenton O'Shea, has prepared a simple, easy to understand explanation of:
WARNING: This explanation does not constitute advice. This explanation is a 'general guide only' and should not be used as an 'instruction manual' in running a case, dealing with a dispute or as a substitute for legal advice. There is no 'standard' guarantee document and all lending institutions whilst requiring basically the same things will have their own specific requirements. These requirements can also vary depending upon the type of loan and transaction being entered into. It is highly recommended that any person being asked to sign a Guarantee and/or Indemnity seeks/gets their own independent legal advice from their chosen legal adviser.