It is an everyday occurrence for a business owner to sign surety for a business loan. The lending institution requires this form of security to cover its perceived risk in lending to the business. However, what most of these business owners do not realise is that they are not only signing surety but they there also signing as co-principal debtors. So what does it matter?
It matters a lot! As a surety you are protected by a principle of the law that requires that the creditor must first use all possible means to recover the debt from the principal debtor. Only after all remedies are exhausted can the creditor claim from the surety. If you are a co-principal debtor you do not have that protection. The creditor can decide which co-principal debtor he wants to claim the outstanding loan amount from.
If the business owner who signed surety (and as co-principal debtor)for the business loan dies, the creditor can decide to claim the outstanding loan amount from the deceased estate of the business owner. If this happens the money that the business owner provided to take care of his dependants will most probably now be used to pay the business creditor and his dependants could be left destitute.
How Can We Solve This Issue
How can this problem be solved? The business owner can take out life cover equivalent to the amount he signed surety for. If he dies his executor can use the proceeds of the policy to repay the loan the business owner signed surety for. The benefit of this action is twofold: the business will be debt free and the business owner’s estate will be unencumbered, leaving his assets to his dependants.
Every business owner should seek the advice of a qualified financial planner to ensure that he has appropriate solutions in place to avoid the unintended consequences of signing surety for his business debt.