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Expert: Finance Guy Date: 5/13/2008 Subject: loc obtained new business, partner left
Question QUESTION: Our 2 year old business obtained a line of credit thru the bank as a Small Business finance option.
At the time we had 5 partners and each partner signed onto the loc and it was explained to us at the time this was a guarantee for each of us for 1/5th of the total loc if all was used. The entire loc is at limit and one partner has resigned.
Is it up to us as a company to collect on this or would the bank be the collector of the 1/5th of this outstanding debt.
ANSWER: I will give you a finance guy and business guy's perspective/opinion.
First, the bank will probably take no action until you are in default on the loan.
Then it will send notices to the company and maybe to each of you personally, if it gets that far.
You did not say, but I assume that the loan is going into default...
It is probably wise for the 5 of you to get together and discuss the alternatives prior to attorneys intervention, et. al.
One thing you should be aware of...
If the bank guarantee you signed was (as they most are) "joint and several", then the bank has the prerogative to proceed against, and will probably simply go after, whoever has the most assets, and then let the 5 of you struggle over how to split the liability amongst yourselves.
Hope this helps.
Good luck.
---------- FOLLOW-UP ----------
QUESTION: The loan is not in default and the business will continue to operate with only 4 partners, however we were thinking that perhaps if the bank would issue a new loc to cover the remaining 4 partners and pay off the current loc leaving only the 1/5th that is owing by the resigning partner - But taking in your answer it appears to me that this would not be the case and it is all of as as a whole who has the most to loose will still be target for the bank.
Note of interest fyi We are located in British Columbia Canada if this may have any impact on the finalization.
Answer Sorry, did not realize that you were in Canada, ay...
OK, what I would do, (IF YOU HAVE A GOOD RELATIONSHIP WITH YOUR BANK) is call your bank and explain the situation and see if they will release your recalcitrant partner from the LOC.
If so, tell your ex-partner that he is free to go for a one time payment of say $20,000 or whatever amount you all think would be an appropriate amount for you to release him from any and all liability from the LOC.
