Reading the fine print – A guide to personal guarantees

As economic growth plateaus in the face of continually high interest rates, businesses are feeling the bite of loan repayments alongside consumers.

To secure financing and reassure lenders, business owners may consider turning to personal guarantees.

In this article, Matthew Johnson, Company and Commercial Director at Palmers, takes a deep dive into the intricacies of obtaining business finance with personal assets.

What is a personal guarantee?

A personal guarantee is an agreement between a business owner or director and lender, typically a bank, building society or credit union. It states that the individual is responsible for repaying a loan made to the business, should the business ever be unable to do so.

This type of agreement may be made to obtain a secured loan – one in which you put up assets such as money or property as collateral as an assurance of repayment to the lender. The major benefit of this type of loan is that you are typically able to borrow a larger sum than would otherwise be open to you.

Although it can be made to cover any loan from a commercial lender, a personal guarantee will typically be made on mortgage payments for commercial landlords or on other large loans.

Some lenders may ask for a personal guarantee covering all of the loan, while others may ask for only a percentage.

Understanding the risk

Many lenders require that business owners seek impartial legal advice before signing a personal guarantee. It protects the lender, since they can say that you understood the risks of the agreement should you have to pay a large amount of money – but it also protects you.

Personal guarantees can open up a lot of doors for businesses, but they are legally binding and carry potentially huge risk for individuals.

Risks of a personal guarantee agreement include:

• Loss of personal assets including your home
• Bankruptcy and disqualification from acting as company director
• Loans may be subject to immediate repayment at the discretion of the lender
• Further costs where individuals are liable for losses made by the lender
• Damage to your personal credit score

To help you to minimise the risk to yourself and your personal assets, you need to understand the details of what goes into a personal guarantee agreement.

Key points of a personal guarantee

Each agreement is slightly different, but most will share a few key points that you will need to review to ensure that the terms are as favourable as possible:

• Liability: If more than one director signs the agreement, they may be ‘jointly’ liable (i.e. liable for 50 per cent of the loan each), or ‘jointly and severally’ liable, meaning the lender can pursue one or both directors for 100 per cent of the loan.
• Amount due: If you agree to cover the cost of the loan with your personal assets in the event the business defaults, you need to be specific in your agreement about the amount or percentage that you will need to repay.
• Enforcement costs: The guarantee document should outline how the creditor will enforce the agreement, as well as whether you are liable for the cost of enforcement.
• Indemnity: If the lender words the agreement to create an indemnity, then you can be pursued without the lender having to first pursue the business itself.
• Assets: Which of your assets exactly are you agreeing to use in case you need to cover your business’ debt? You can use this clause to protect essential assets such as your home.
• Renegotiation: You may wish to renegotiate the terms or remove the guarantee altogether if your business is performing well and meeting its repayments – check if your agreement includes the option for renegotiation.

Negotiation support

You should always seek legal advice before signing a personal guarantee agreement to ensure that you understand the risks to your personal finances and assets.

A solicitor will be able to review your agreement and help you to negotiate more favourable terms, making sure that it does not indemnify you for unexpected costs. The wording of your contract needs to be specific to minimise your liability while still meeting the terms of the loan.

They will also be able to negotiate with your lender on your behalf if you are struggling to meet your repayment schedule.

Please contact our team today for further support on personal guarantees and protecting your assets.