As a member of a corporation, you carry a set of responsibilities that can extend to guarantying a small business loan. When analyzing a business loan request, lenders consider the risk of the business becoming unprofitable. If this happens, the repayment of the loan will be in question. To mitigate this risk, the lender requires principal members of the corporation to personally guarantee the loan.

Who Guarantees

When a lender makes a business loan to a corporation, it is standard to require any member who owns more than 20 percent of the company. The business itself will be the primary borrower, and the loan will be made on its strength and stability. The guarantors ideally exist to provide backup in case the business takes an unexpected financial downturn. If the guarantors are stronger than the business, the lender will make all parties co-borrowers to make them all directly liable for the loan.

Documentation

The obligor signs the promissory note, which essentially serves as the contract for the loan. Each guarantor will sign his own personal guaranty agreement. The guaranty will reference the promissory note and detail how the guarantor is responsible for the loan in the event the corporation can't pay. The agreement also outlines the guarantor's requirement to provide updated financial information on an annual basis. This is typically in the form of the most recent federal tax return and a personal financial statement of assets and liabilities. If the guaranty is limited to the member's ownership interest in the company, 20 percent for example, the document will state that the guaranty is limited to 20 percent of the loan.

Responsibility

As detailed in the guaranty agreement, all members of the corporation that guarantee the loan must make the payments in the event the business can't. If the business goes under and the loan goes into default, the lender can take legal action against the guarantor just as it can with the corporation itself. For this reason, the guarantor must show stable income and sufficient liquidity over the term of the loan.

Release

If a guarantor wants to be released from his obligation, the lender must offer its consent. Typical reasons to seek release include a guarantor leaving the company and an increase in profits on the part of the corporation. To obtain release, make a formal request of the lender. Provide the most up-to-date financials for the corporation and all guarantors. If the lender determines that the company and remaining guarantors provide enough income and liquidity, it will mark the original guarantee as cancelled and provide a copy to the guarantor, indicating that he no longer has any personal obligation for the loan.