Why Do Equipment Leasing Companies Ask Business Owners For A Personal Guarantee?

Congratulations! You have just been offer a leasing deal, but the sting in the tail is that you have to provide a personal guarantee, often referred to as a “PG”

Some company owners just point blank refuse to sign a PG for a whole variety of reasons.  For example, in America, business leaders, company owners and entrepreneurs believe that it is generally acknowledged that they are taking a risk when running a business hence it is the job of a bank or leasing company to take a risk too.

Understanding leasing companies

However, a leasing company is actually paying you a compliment if they ask for a personal guarantee. They are saying they want to lend to you and, in effect,  just seeking a little bit more comfort.  We often see banks asking for personal guarantees from lifestyle companies where individuals take a lot of money in salary and dividends.

One of the key reasons for asking for a personal guarantee is that if a business owner defaults on the lease, he or she will be more motivated to work with the bank to sell the equipment and get the best price for it. The user of the equipment is often the best person to be involved in selling the equipment in question. With no guarantee, an owner could in theory just walk away leaving the bank more often than not with a loss.

Legal aspects of leasing and personal guarantees

Legally, a leasing company could take the equipment back and then under the personal guarantee ask for the difference in the settlement figure and the price they got for the equipment. In practice, if you work with the leasing company and even take out the lease rental in your own name, the leasing company will work with you.  WestWon has many years’ experience in the industry and in our opinion leasing companies generally just want to get their money back: they do not want the hassle of enforcing a guarantee. If you speak to the leasing company and help them, they will be sympathetic.

Lastly, banks ask for a personal guarantee as proof that the business owner really believes in the business. Their thought process is simple, if you know the business and have faith in it, what is the problem of offering a PG as the company will be able to make the repayments anyway.