Commercial Law

Personal Guarantees

March 25, 2021

A personal guarantee is a document which requires an individual, usually a director or partner in a business, to make a legally binding promise to repay credit provided to the business. This means that in the event that the business is unable to repay the credit advanced, the Guarantor then becomes personally liable to make the payment instead. In most cases, it is enough for a demand to be made of the business and then the creditor can choose which of the business, individual or, indeed, both it wants to pursue since most Personal Guarantees leave the Guarantor jointly and severally liable with the business. With that in mind, taking the decision to become a Guarantor on a loan to your business is one that shouldn’t be taken likely as, in the event that the business finds itself in financial difficulty your personal liability for the debt could put your home at risk.

Personal Guarantees; a double-edged sword

This risk makes Personal Guarantees a double-edged sword. On the one hand, they are a useful tool in the armoury of the trade creditor or lender and offer protection in the event that a business fails to repay its debt, on the other hand, they are less attractive to the person being asked to give it and offer the potential to impact on their personal life. The advice to lender and trade creditors is to demand a Personal Guarantee at all costs (after all, for their protection they should only want to give credit to a business whose directors are certain of its solvency and prove it by putting their own money up as security). The advice to the would-be Guarantor is not to enter into such a document (the potential for personal loss is enormous and can result in liability virtually in perpetuity and with limited recourse). 

Reducing the risk of a Personal Guarantee

For those directors being asked to give Guarantees, often there is little choice. Guarantees are a standard form of security required by banks and lenders for a range of different facilities, most of which are necessary for the business to function, expand or complete a particular project. Without a Guarantee, the business cannot obtain the necessary finance. In many cases it’s advisable that the Guarantor considers stipulating a cap on the extent of their liabilities. Doing this when a company is flourishing is far easier than when it is in financial difficulty.

As a result of the risk connected to any Personal Guarantee, it is important that when agreeing to Guarantee any form of credit to the business, whether that be relevant to a mortgage, loan or other facility or whether the same is required by an intended trade creditor, that full and proper, independent legal advice is obtained on the content of the Guarantee, that amendments are made, as necessary and, where possible, to avoid the potential for endless liability. Taking appropriate legal advice before entering into any financial agreement can potentially reduce interest levels on large debts and reduce the risk of bankruptcy.

Before signing a Personal Guarantee it is vital that you obtain legal advice so you fully understand what you are agreeing to. Our team will provide you with the expert legal advice you need. Email us or call on 01795 472291.