As a business owner, you will likely face requests for personal guarantees (sometimes referred to as a director\u2019s guarantee when requested from a director) when entering into commercial contracts. We regularly see entrepreneurs sign these guarantees without fully understanding how these obligations could affect their personal finances and assets.\u00a0This article explains the purpose of a personal guarantee and the risks and responsibilities of agreeing to one.\u00a0<\/p>\n\n\n\n
A guarantee is a legal commitment made by an individual, typically a business owner or director, to personally repay a debt or fulfil an obligation if the primary party (usually a business) fails to do so. <\/p>\n\n\n\n
Business owners commonly provide personal guarantees for their company\u2019s debts or contractual obligations. Take this scenario: you approach a bank for a business loan, and they require you to guarantee the repayment personally. If your business cannot pay, the bank can then claim the debt from your personal assets.<\/p>\n\n\n\n
On the other hand, where you sell goods or services to businesses on credit or deferred payment terms, you may have concerns about your customer\u2019s ability to pay you. To mitigate this risk, you may request that your customer\u2019s company director(s) enter into a personal guarantee with you so that they are responsible for paying your customer\u2019s debts personally if your customer does not pay.\u00a0<\/p>\n\n\n\n
Therefore, while this article focuses on entering into a personal guarantee as a guarantor, it may benefit your business where you benefit from the guarantee.<\/p>\n<\/div>\n\n\n\n
You will encounter personal guarantees<\/a> in several business situations. Landlords typically demand them before leasing a commercial property to your company. Suppliers often require these guarantees before offering new\/smaller businesses credit terms. Financial institutions almost always insist on personal guarantees when lending to small or medium-sized enterprises, as it provides them with added security.\u00a0<\/p>\n\n\n\n You may receive requests for:<\/p>\n\n\n\n\n