For many married couples, one partner is involved in a business whilst the other is not. It is rather surprising but quite common that both spouses are named as personal guarantors to financial institutions and other creditors for the business.
The truth is such personal guarantees are rarely a requirement of a contract and in case of default, the couple will lose everything.
So why do most lenders ask both spouses to be named as guarantors? Simply because they can. The lender is doing what is best for the company, not what is best for the married couple. The best thing to do is refuse to allow your spouse to be involved. This way at least one of you is not liable for the debt.
With a business entity set up as a trust, this has no negative impact on the ability of your spouse to recover property in the case of divorce or death. There is no financial impact to your spouse, but risk is greatly minimised.
Property Investment
In the case of a couple who wishes to buy property for investment purposes, consider carefully whether or not both spouses need to be included on the financial documents. For instance, if you work and your spouse does not, or you alone earn enough income to qualify for a loan, then there is no need to include both parties. Should the worst happen and the debt be defaulted upon, only one of the couple will face bankruptcy instead of both.
It might not be easy to get the lender to agree to debt service for only one member of a couple. In this case, a mortgage broker can negotiate on your behalf and will undoubtedly have much greater success finding a loan product that can be written without your spouse's guarantee. Their borrowing position is stronger and they have the necessary experience to induce a lender to agree to this term.
Commercial Leases
If you lease commercial space for your enterprise, consider changing the structure of your business so that it includes a separate tenancy company. One spouse becomes director and only the director gives a personal guarantee for a lease. Try to negotiate a fixed sum for the liability that equals no more than several months' rent. Unlimited liability could potentially destroy your financial portfolio in one fell swoop.
Business Creditors
The same advice applies to any other creditors approached for financing the enterprise. Ask that the debt be serviced without a personal guarantee. If the lender refuses to do so, then ask that a limit be placed on liability. When push comes to shove, many creditors will accept your terms but you'll never know if you do not try.
Remember that personal guarantees need not be required for every type of credit transaction your business contracts. If you must sign a personal guarantee, protect your spouse from liability and ask the creditor to limit the maximum amount personally owed on the debt.
Author Resource:
Paul Easton is working with Gilligan Rowe & Associates are New Zealand Accountants and are a specialist Accountant firm and experts in property and family trusts.
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