Personal guarantees | Splinter

Personal guarantees

Company directors are frequently required to provide a personal guarantee to a lender as security when borrowing money for their business. In other words, if the company doesn’t make its payments, the director has personal responsibility for the debt.

The director must carefully weigh the risks and seek legal counsel to ensure they do not put themselves in a precarious situation when a lender requests they sign a guarantee agreement.

What is a personal guarantee?

A personal guarantee is simply a pledge from the borrower to the lender that the director would be held personally accountable for the debt if the company is unable to pay back the loan.

A corporate director with high levels of confidence in the success of their business may find it easy to assume that their own personal risk would be minimal as a result, adding another layer of security for the lender and increasing their assurance that they will be reimbursed for their money.

For many businesses, subscribing to a personal guarantee is a method to gain access to capital that would otherwise be out of reach because good unsecured business loans are difficult to come by.

Nothing in business, however, is ever guaranteed, so it’s prudent to take certain safeguards to avoid getting yourself into trouble.

Although directors’ personal guarantees are frequently drafted with a limit on the director’s personal liability, personal guarantees are legally enforceable contracts that become enforceable the moment they are put in writing. A guarantee’s validity is dependent on the details outlined in the specific guarantee and is not fixed in time.

What things should you consider before signing a personal guarantee?

A director may want to take the following factors into account when seeking to borrow money:

As a director, you may be forced into bankruptcy and lose your ability to serve as a director in the future if it becomes necessary for you to pay the debt with your own assets and you are unable to do so.

You may end up with a negative credit rating if you fall behind on your repayments. Personal guarantees are frequently subject to prompt repayment on demand.

Personal guarantees can come with an “indemnity”, or an agreement that the debtor will cover any losses incurred by the creditor.

The bank may sell any personal property used as collateral for the guarantee without having to take legal action, including the director’s private residence.

Always get your solicitor to check the wording of any agreement before you sign it.

There is no need to take personal responsibility for the debt if the company can serve as security for the loan.

Before committing to a personal guarantee, a director might want to think about answering the following questions:

  • What specifically falls under the guarantee’s definition of a default?
  • How could the creditors enforce the guarantee?
  • Would they give notification for unpaid debts or only make a payment demand?
  • Is there a period of recovery?
  • Are there any chances that your personal financial or asset situation will change after executing the guarantee?
  • Does the guarantee contain a clause mandating that personal demands be made on you only as a last resort by the creditor?

It is frequently necessary to provide a personal guarantee to obtain the capital required to expand a firm, but it always pays to exercise prudence.

Our concerns would be: what are the reasons for this possibility arising? Where that possibility exists, it indicates a weakness in the financial management of the company.

How we help 

We provide our business owner clients with a very thorough look at all financial aspects of their business. This often reveals hidden assets within the business that, with some financial reorganisation, can be turned into cash.

Our Total Planning System also provides motivation for business owners to grow their businesses without resorting to external finance.

If a loan is required, we can often arrange for the company to act as its own banker and provide the funds itself.

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