Understand the guarantee attached to the loan

Identify every document and signer

Ask the lender to identify which people and entities must sign the borrowing documents and any guarantees. Request the actual proposed wording through its secure process. A general assurance that a structure is standard does not explain what a particular signer is promising.

Have independent counsel explain the scope, duration, security and enforcement provisions. Ask whether related documents create additional obligations and what happens if ownership changes. This is a document-review task, not something a magazine can determine from a loan’s marketing description.

Consider changes in circumstances

Discuss what a guarantee means if the business cannot pay, if a partner leaves or if the business is sold. Ask whether release is possible and what the lender requires. Do not assume that handing over day-to-day management or selling an interest automatically ends a promise made to a lender.

Where several owners are involved, examine how the external obligations relate to their internal agreement. One document may allocate responsibilities between partners without changing what the lender can demand. Counsel can help make those differences clear.

Keep household planning separate and connected

An accountant or financial adviser can help examine the effect of the proposed exposure on reserves and other commitments. Keep sensitive financial records out of general inquiry forms. Before signing, be able to describe in ordinary language who owes what, under which conditions, and which decisions could change the obligation.

Put it on paper

• Obtain the actual proposed guarantee.
• Ask about default, transfer and release.
• Review partner and household exposure independently.

Continue with the franchise research checklist, our FDD guide, and the research directory.