What is a personal guarantee — and do you need one?

For many businesses, a personal guarantee is the only way to obtain new finances in order to grow the company. It’s wise to research finance options as a precaution when your business is doing well,  because it can mean that you get better rates on funding. But the idea of a personal guarantee can be daunting, so we’ve answered the most common questions people have about them.

What is a personal guarantee?

In short, providing a personal guarantee means you (as a business owner or a director) will be personally liable if the business defaults on its loan.

Borrowing money is a common fact of life for many businesses and there are almost no circumstances in which a lender will not seek some form of security for their loan.

Who can give a personal guarantee?

Directors with a minimum of a 20%-25% stake in the limited business may be expected to give a personal guarantee.

In many cases, there is no need to involve the directors of the company in the security situation. Equally though, there are occasions on which they could be asked to give personal guarantees to secure finances.

From a lender’s point of view, the personal guarantee is often seen as evidence of the directors taking a certain level of personal responsibility for their company’s debts. This is because if the debt cannot be repaid by the business itself, the guarantee can be enforced against the personal assets of the guarantor.

How enforceable is a personal guarantee?

When giving a personal guarantee, the director might ask the question as to how enforceable it might be. This could be a problem where the property at stake is a private family dwelling and there are dissenting voices against taking the risks involved. In essence, the guarantee is enforceable where consideration has been given — which in most cases will be in the form of the lender agreeing to lend.

When is a guarantor released?

A guarantor can ask to be released from the obligations at any time, even if the debt has not been paid off, but it would be up to the lender to decide.

Once the debt has been discharged, then the lender should release the guarantor. Getting released can be problematic if a director resigns while there is a debt in place and the lender does not accept that another director is an adequate alternative guarantor.

A private matter

From a privacy point of view, a personal guarantee is not registered at Companies House and so is not on public record. Additionally, a personal guarantee is not required to be disclosed in the company’s financial statements. The personal guarantee remains a confidential matter between director and lender.

Before signing on the dotted line, it is important to get some independent expert advice to mitigate any personal risks.

  

If you have any questions about personal guarantees, then please feel free to get in touch via the form below.

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