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Understanding Personal Guarantees in Business Contracts

Table of Contents

In Short

  • It is a legal commitment to repay a debt or fulfil obligations personally if your business defaults, putting your personal assets at risk.
  • Your liability may extend beyond the business, including your home and savings. Guarantees can remain active even after leaving the business unless properly terminated.
  • Negotiate limits, monitor obligations, and seek independent legal advice before signing a guarantee.

Tips for Businesses

Before signing a personal guarantee, thoroughly review the terms, including your total liability and the conditions for termination. Explore alternatives like caps on liability or alternative security arrangements. Always seek legal advice to understand the risks and ensure your personal and financial security.

As a business owner, you will likely face requests for personal guarantees (sometimes referred to as a director’s 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. This article explains the purpose of a personal guarantee and the risks and responsibilities of agreeing to one. 

What is a Guarantee?

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. 

Business owners commonly provide personal guarantees for their company’s 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.

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’s ability to pay you. To mitigate this risk, you may request that your customer’s company director(s) enter into a personal guarantee with you so that they are responsible for paying your customer’s debts personally if your customer does not pay. 

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.

Common Types of Business Guarantees

You will encounter personal guarantees 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. 

You may receive requests for:

  • unlimited guarantees covering all future debts; or 
  • guarantees limited to specific amounts.
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Key Elements of a Valid Guarantee

The law requires specific elements to make the guarantee enforceable

  • you must put your guarantee in writing and sign it. Verbal guarantees create uncertainty and courts rarely enforce them. The written document should clearly identify all parties – the guarantor (who provides the guarantee), the creditor (who receives it), and the principal debtor (whose obligations you guarantee);
  • you must receive something in exchange for your guarantee. In business contexts, this typically happens when the creditor provides a loan or service to your company in return for your personal guarantee. Otherwise, the guarantee needs to be executed as a deed (meaning there is no consideration);
  • your guarantee must clearly specify which obligations you are guaranteeing. Vague or open-ended guarantees create risks. For example, stating “I guarantee all future debts” might prove dangerously broad. Instead, specify amounts, time periods, or particular contracts or clauses in contracts covered by your guarantee; and
  • you must give your guarantee freely, without pressure or coercion. If someone forces or misleads you into providing a guarantee, you may have grounds to challenge its validity. This particularly matters in family business situations, where personal relationships can create undue influence.

Risks and Responsibilities

When you provide a personal guarantee, you take on substantial risks that extend beyond your business. Your guarantee makes you personally responsible if your business fails to meet its obligations related to the guarantee. Your personal assets, including your home and savings, become vulnerable to creditors’ claims if your business defaults. 

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Your guarantee might remain active even after you leave the business, unless you properly terminate it. If you have signed a “joint and several” guarantee with others, creditors can pursue you for the entire debt, not just your portion.

Protecting Yourself When Giving Guarantees

You can take several steps to protect yourself before signing a guarantee: 

  • try to negotiate caps on your liability by setting specific amounts or time limits;
  • ask for regular updates about the guaranteed obligations to monitor your risk level;
  • include clear conditions that specify when the guarantee will end; and
  • consider proposing alternative security arrangements to the other party.

It is essential to get independent legal advice to fully understand your personal exposure, including the risks of signing a personal guarantee. 

Enforcing Guarantees

Creditors must typically follow a specific process when enforcing guarantees, starting with pursuing the primary debtor before pursuing guarantors. However, with “on-demand” guarantees, such as when there is an indemnity in the guarantee, creditors may be able to immediately claim against the guarantor without this step. 

Courts consistently uphold clear guarantee provisions, making it essential to understand your commitments thoroughly before signing. Enforcement can include court proceedings, statutory demands, and various recovery methods against personal assets.

Key Takeaways

Personal guarantees create serious legal obligations that directly affect your financial security. You need to carefully consider these guarantees because they put your personal assets at risk. Before signing, make sure you:

  • understand your total liability exposure;
  • explore all available alternatives;
  • implement protective measures; and
  • plan your exit strategy.

If you need help with guarantees in business contracts, our experienced contract lawyers can assist as part of our LegalVision membership.  For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents.  Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions

What is the difference between a guarantee and an indemnity?

A guarantee creates a secondary obligation that activates upon default, while an indemnity establishes a primary obligation to cover losses directly, in some cases on-demand.

Can a personal guarantee be cancelled?

You cannot cancel a personal guarantee unilaterally unless your contract specifically allows it. However, you can negotiate with your creditor to release you or negotiate alternative security.

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Humna Ahmad

Humna Ahmad

Trainee Solicitor | View profile

Humna is a Trainee Solicitor at LegalVision within the Corporate and Commercial team.

Qualifications: Humna graduated from the City, University of London with a Bachelor of Laws (Hons) and then completed the Legal Practice Course and Masters in 2023. Prior to joining LegalVision, Humna worked at a high-street firm, gaining experience in a variety of areas such as Property, Corporate and Commercial.

Read all articles by Humna

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