PETALING JAYA: When Leong took over the family hardware business from his father in 2019, he decided to expand the company after noticing that customer orders were rising.
“My father started the company in the 1980s. It’s a retail and wholesale supply business for hardware and building materials.
The company took a bank loan of about RM500,000 to support the expansion, with Leong signing on as the corporate guarantor.
“I guaranteed the loan because the bank required it. I believed the business could handle the repayments,” he said.
However, the Covid-19 pandemic hit in 2020, severely disrupting operations.
“Construction projects stopped, customers delayed payments and it became very hard to do business.”
As revenue dropped, the company struggled to meet operating costs and loan repayments.
“We had to lay off some workers and I even used my personal savings to service the loan for some time.”
Eventually, he could no longer keep up.
“In the end, I couldn’t cope anymore. The bank kept chasing for payment and the debt kept growing,” he said.
With the loan still outstanding and no viable way to repay it, Leong filed for bankruptcy.
“I never expected things to turn out like this when I signed the guarantee. At that time, I thought it was just part of running the business.”
Many business owners are unaware of the full implications of signing a personal guarantee when securing loans for their companies.
Signing a personal guarantee for a business loan can feel like a routine requirement to secure financing for many entrepreneurs.
But when a company runs into trouble, it can quickly become a personal financial crisis – as shown by the rise in bankruptcies involving corporate guarantors over the past four years.
Another businessman, Adam, 48, from Kuala Lumpur, said he also did not realise the full implications of signing a personal guarantee.
“I honestly thought that if the business failed, it would only affect the company because it was a business loan.”
Adam was involved in a food supply business with his brothers when they took a loan to stabilise finances after the pandemic.
“We were struggling with cash flow. Business was slow and payments were coming in late so we took a loan to help keep the company afloat,” he said.
Their bank required all directors to sign personal guarantees before approving the financing.
“At that time, we just agreed because we needed the funds to continue operating.”
Only later did Adam realise that the guarantee meant he could be held personally liable should the company fail to repay the loan.
“I didn’t know the bank could come after me personally. I only understood the risk later,” he said.
With his business still struggling to recover, Adam said the pressure remains.
“The recovery has been very hard, especially with the current economic conditions. Costs have gone up and business is still not like before.”
A licensed financial planner, who does not wish to be named, said many business owners underestimate the legal implications of signing a personal guarantee.
“In SME financing, it is very common for banks to require directors or major shareholders to act as personal guarantors before approving loans.
“This means that if the company defaults, the bank can pursue the guarantor personally for the outstanding debt.”
Many entrepreneurs, he pointed out, assume their personal assets are protected because the company is registered as a private limited entity.
“People think that because the business is a limited liability company, their personal finances are separate. But once they sign a personal guarantee, that protection is effectively bypassed.”
Under Malaysian law, creditors can initiate bankruptcy proceedings against an individual if the unpaid debt exceeds the prescribed threshold and remains unresolved.
Once declared bankrupt, the individual’s financial affairs fall under the administration of the Insolvency Department, which may involve restrictions on financial activities and asset management.
He said the rise in cases linked to corporate guarantees highlights the importance of financial awareness among business owners.
“Signing a personal guarantee should never be treated as a formality. Entrepreneurs must fully comprehend that they are putting their own financial future on the line if the business fails.”
