Synopsis

Banks or other lenders like to get personal guarantees from spouses for mortgage and business loans, and they are not shy in asking for them. Borrowers should anticipate this and plan in advance how to  say “no” and still get the loan. It is not always possible, but without some advance thinking and planning, it is easier to resist the demand for the guarantee.

Your company’s banker wants the personal guarantee of your spouse. Just say No. The best way to say it and make it stick is never to even hint that a guarantee from your spouse might be possible. This applies whether your are applying for a new facility at the same or a new bank, or during your banker’s annual review.

You will not always be successful, and in the end the reality may be a choice between foregoing the financing and imperiling the business or its future growth, or risking the combined assets of your household and family. 

A good place to start is the Net Worth form which you are usually asked to prepare.  The forms always contain spaces to complete your spouse’s name, and then go on from there for details like your spouse’s occupation, income and assets. Do not fill any of this in – not even his or her name.  Just write instead: “GUARANTEE NOT AVAILABLE”. That will often cause the bank to back off, or if it doesn’t, it sets the stage for your oral position that “My spouse will not give any guarantees”. This implies to the banker that the details of your marriage are out of bounds. Be firm, polite and unconditional; waffling sounds a lot like “maybe”.

If reality dictates that a spousal guarantee is necessary, instead of an open-ended admission that it may be possible, use the banker’s request as an excuse to temporarily end the meeting while you discuss it with your spouse. At the follow-up meeting, only come back with a limited offer; for example, “My spouse will guarantee only up to $25,000 for 1 year, which is [you say] large and painful enough to prove his/her full support for the venture”. Your comeback can be limited to amount, length of time or even to limited recourse to assets and implies that while these may be up for negotiation, the open-ended guarantee is not negotiable.  

Be sure to be honest when completing a net worth statement – don’t fudge the ownership of assets between you and your spouse. Smart lenders are alert to this, and dishonesty will destroy any relationship and certainly the chances of obtaining the credit. Among other things, this means that before applying for the loan or credit, you need to plan the ownership of assets as far in advance as possible. Beware also that re-arranging assets between spouses has family law consequences as well, especially when dealing with assets other than the matrimonial home. Family law advice, or even a marriage agreement in some instances, may be appropriate.

A word of caution…the purpose here is to protect against catastrophic loss. If you pauperize yourself and put every asset into the name of the guarantee-free spouse, the chances of getting the loan without your spouse’s guarantee are reduced. The lender needs to see that you “have skin in the game”. For example, if your home has lots of equity in it, your spouse should own it.  You might own the cottage with the large mortgage on it. As another tip, think of the family cars as liabilities on the asset side of your net worth statement – there is nothing wrong with owning them and recording them as assets. If the bank were ever to call the loan, they really aren’t worth very much.

For more information on banking, please contact Wesley Brown at (416) 368-1744 or by email at wbrown@businesslawyers.com.

© Morrison Brown Sosnovitch LLP, 2013 All rights reserved.