Security: what the lender can take
Most business lending is secured. In the US this is typically a security interest perfected under the UCC; in most of Canada it is a security agreement registered under provincial PPSA legislation, and in Quebec a hypothec.
Read the collateral description carefully. 'All present and future assets' language is common and means exactly what it says. Specific-asset security is narrower and worth asking for where the borrowing does not justify a general charge.
Covenants and events of default
Financial covenants require you to maintain defined ratios. Breach one and you can be in default even though every payment has been made on time — a fact that surprises many borrowers.
Look also at 'material adverse change' clauses and cross-default provisions (a default under one agreement triggering default under another). Ask whether the covenant tests are realistic against your own forecasts, and negotiate cure periods.
Personal guarantees
A personal guarantee puts your own assets behind the company's debt, deliberately working around the liability protection you gained by incorporating. It is the single highest-stakes document most small-business owners sign.
Guarantees are more negotiable than borrowers assume. Consider seeking a cap on the amount, a time limit or release on refinancing, removal of a spousal guarantee, and clarity on whether the lender must pursue the company's assets first.
Before you sign
Model the covenants against a downside case, not just your plan. Understand the true cost including fees, prepayment penalties, and rate-change mechanics. Confirm which entity is borrowing and who is guaranteeing.
Get independent legal advice on the guarantee specifically — separately from the corporate loan review — because the personal exposure is different in kind from the company's.
Frequently asked questions
- Does incorporating protect me if I sign a personal guarantee?
- No. A guarantee is designed to bypass that protection and reach your personal assets, which can include your home and savings.
- Can I negotiate a personal guarantee?
- Often yes — caps, time limits, release conditions, and removing spousal guarantees are all commonly negotiated, particularly where the company can offer other security.
- What is a covenant breach?
- Failing a condition in the loan agreement, commonly a financial ratio. It can trigger default and allow the lender to demand repayment even if payments are current.
- What does 'all present and future assets' security mean?
- The lender takes security over essentially everything the business owns now or acquires later, which limits your ability to grant security to anyone else.
- Is it worth having a lawyer review a standard bank form?
- Yes. Standard forms are drafted for the lender, and the security and guarantee provisions carry the largest downside in the transaction.
This guide is general information, not legal advice. Laws, costs, and procedures vary by state, province, and your specific situation — speak with a qualified banking & finance lawyer about your circumstances before acting.