The new customer’s credit is a little thin, but the owner appears to have a substantial net worth and has agreed to sign a personal guaranty. The financial statement arrives. DocuSign reports completion. The lender funds the deal and everyone breathes easier. But then….
… the customer defaults. The guarantor disputes the e-signature, the impressive assets unfortunately belong to other entities, and the house has considerably less equity than the financial statement suggested. Suddenly, the guaranty feels less like a source of repayment and more like an invitation to hire a lawyer.
Before taking comfort in that signature, ask three questions: Did the guarantor actually sign? What did the guarantor promise? And what can you realistically collect?
Is that Really My DocuSign Signature?
Electronic signatures are useful. So is the supporting audit trail connecting the signature to the person you intend to hold responsible. However, a completed document bearing someone’s name does not eliminate an authentication dispute, even if the audit trail suggests otherwise.
If possible and practical before you fund, confirm who controls the e-mail address, use authentication appropriate to the transaction, and retain the completed guaranty, certificate of completion, and available audit trail. Preserve the communications arranging execution. A timestamp or IP address may help, but it is not a substitute for understanding who actually signed and how you can prove it. E-mails surrounding the signature can be helpful.
In one case, a California court declined to compel arbitration because the employer failed to authenticate the employee’s purported electronic signature. That was an employment case, not an equipment finance case, but the practical lesson travels well: someone needs to be able to explain the signing process and connect it to the signer.
What Exactly Was Guaranteed?
Check the verbiage of your personal guaranty form. Review any limitations. Is there a dollar cap? Does it cover future advances, renewals or amendments? Does liability decrease as payments are made? What notices or demands are required? Review the effect of later changes before assuming an old guaranty covers a new arrangement.
Check the enforcement provisions, too. Governing law, forum, attorney’s fees and applicable limitation periods deserve attention before default. “We use our standard guaranty” is a description of your filing system, not a legal analysis.
Net Worth Does Not Equate to Collectability
A personal financial statement is a starting point. But take it a step further. Find out who owns the significant assets, how they are titled, what liens secure them and whether the stated values are supportable. A $5 million property with nearly $5 million in secured debt does not offer $5 million of comfort.
An interest in an LLC is different from personal ownership of the LLC’s real estate or equipment. Joint ownership, trusts and exemptions may complicate or restrict collection. The answers depend on the ownership arrangement and applicable law. “He owns a lot of things” leaves rather a lot unanswered.
Consider liquidity and other obligations as well. A guarantor may have pledged the same financial strength to several lenders. Obtain updated information when extending additional credit rather than relying indefinitely on the statement that accompanied the first application.
Consider the Cost of Being Right
Even an enforceable guaranty against a solvent person may require litigation and judgment enforcement. Assets in another state, disputed ownership or a bankruptcy can add expense and delay. A fee provision helps only to the extent the resulting award can be collected.
Estimate the likely recovery after senior claims, exemptions and enforcement costs. Where justified, consider obtaining separate collateral from the guarantor, with appropriate documents and perfection steps. A personal guaranty alone does not give you a consensual lien on every asset listed in the financial statement.
I am all for personal guaranties. I am less enthusiastic about treating them as a substitute for underwriting. Verify the signature, understand the promise, and investigate the assets while the prospective borrower or lessee still wants the financing. The best time to discover that your “guarantor” has nothing available to pay you is before you fund the deal.
