What is a Personal Guarantee?

When trying to secure finance for a business, a lender might ask for a personal guarantee from the business owner or an executive that they’ll make the repayments on the loan if it turns out that the business itself can’t.

Becoming a business loan guarantor in this way may be something you would prefer to avoid. But if you are willing to accept the conditions attached to it, the additional security that personal guarantees by directors can give to a lender could prove the difference in getting the funding that you want.

What are personal guarantees?

A personal guarantee is a legal agreement between a lender and the owner of a business who is promising to be a guarantor for credit awarded to their business. The main implication of this is that the owner can be held responsible for paying back the lender what is owed using their own personal assets should the business default on its loan repayments or go insolvent.

For this reason, a personal guarantee is not something to be entered into lightly. But equally, many business owners are willing to sign up to what is often also called a “director’s guarantee” because it’s the only way they can secure the finance they need for their business.

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When might I need a personal guarantee?

A personal guarantee can help lenders mitigate the risk they feel they are taking on by lending to businesses. Because of the additional safety net of being able to call on the business owner to personally repay the loan should things go wrong, lenders might therefore be willing to offer a loan, or a larger amount of finance, than they otherwise would.

In particular, a personal guarantee could prove important in helping newer or smaller businesses secure funding if they can’t provide the security a lender needs. An owner acting as a business loan guarantor might also help if a company’s credit history isn’t sufficient or good enough to make them eligible for a business loan purely on their own merit.

It’s possible a lender might request a personal guarantee for businesses interested in:

• business loans
• business mortgages
• property leases
• invoice financing
• asset leases

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Personal guarantee pros and cons

There are a few obvious benefits of personal guarantees, as well as important considerations to be aware of too.

Advantages of personal guarantees

• It may allow your business to get finance if it has little credit history or bad credit.
• A lender might offer more favourable terms because of the guarantee.
• The funding can help your business grow and reach its potential.

Risks of personal guarantees

• You may arrange a loan and sign up to a personal guarantee confident of your business’s ability to repay, but there is always the risk this might change.
• Unless you are set up as a partnership or sole trader, personal assets can’t usually be pursued by creditors to settle business debts, but with a personal guarantee they may be able to if the business cannot pay.
• As a business loan guarantor, your savings, investments, home and other assets could all potentially be used to repay what is owed by the business, putting your personal finances at serious risk.
• If your assets are insufficient to cover the debts of the business, you could end up personally bankrupt.

How long does a personal guarantee last?

A personal guarantee is valid for the length of time specified in the agreement. If there is a time limit for the guarantee, a business loan guarantor’s obligation to personally cover the debts of a business should come to an end when this passes.

These limitation periods should be discussed and agreed when the personal agreement is drawn up. A solicitor can help you negotiate and make sure you understand the terms of the agreement.

Can you limit your liability under a personal guarantee?

It might be possible to negotiate a cap on the amount of debt you could be liable for under a personal guarantee. It’s also important to establish which loans will be covered by the guarantee, and the situation regarding any additional credit that might be taken out from the same lender in the future.

Carefully considering all the terms of a guarantee agreement is essential. A solicitor can help you understand exactly where your responsibilities as a guarantor begin and end.

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What happens if you default on a personal guarantee?

Defaulting on a personal agreement may allow the lender to make a claim for any asset that was put forward as collateral under the agreement. If you don’t pay on time, you run the risk of legal action from the lender or even a petition to make you bankrupt.

What is personal guarantee insurance?

Personal guarantee insurance can be taken out by a business loan guarantor to provide some financial protection to their personal wealth should the guarantee be called on. However, the insurance won’t ever cover the guarantee in its entirety. The cost of the personal guarantee insurance policy will vary depending upon factors such as the size of the guarantee and the assets being used as security.

Do you need legal advice before entering into a personal guarantee?

Most lenders will want you to have independent legal advice before signing a personal guarantee. From your own point of view, seeking such professional advice can help ensure you are fully aware of the terms of the agreement you’re about to enter into and assist with negotiations on these terms if necessary.

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