What Does a Personal Guarantee Mean for My Business?

If you are running a business where you are hoping to secure investment, such as a loan from a lender or a bank, then you may come across the term ‘personal guarantee’. A lender may ask for a personal guarantee as part of your agreement. Therefore, it is important to know what a personal guarantee will mean for your business and personal position. This article will explain what a personal guarantee is and how it works.

What is a Personal Guarantee?

A personal guarantee is usually an agreement between a borrower and a lender. In the agreement, the borrower promises to personally pay back the borrowed money even if the business cannot.

Suppose you are undertaking a personal guarantee to someone you borrow money from. In that case, you are promising that you will personally pay the business debts if the business comes into financial difficulty.

When Should I Enter Into a Personal Guarantee?

Agreeing to a personal guarantee can be a good way of giving extra security to the lender. Usually, this means that the lender will be more likely to give you credit in the first place because you are giving them a backup plan in case the business debts become so great that the business becomes insolvent. 

It can be a good idea to enter into a personal guarantee if the lender wants extra security for the loan that they are making to you. However, you will also want to be confident that your business will not get into financial difficulty. If it does, you will have a personal obligation to pay back the debts. Additionally, you have to liquidate any personal assets that you have to do so. 

Advantages and Disadvantages of a Personal Guarantee

As a small or medium-sized business, it can be difficult to get a business loan from a lender. This is because your company may not have the track record to show that it can pay back any credit. Because of this, a personal guarantee gives you the advantage of:

• increasing your chances of getting a business loan for your business; and
• helping your business grow to its next stage.

At the same time, a personal guarantee will have disadvantages, for example, you:

• will have personal responsibility if the company debts become too much; and
• are not protected if something unexpected happens, which makes your company insolvent.

Given these considerations, it is important to weigh up the advantages and disadvantages that a personal guarantee will offer to your business. For example, if you value business growth and need funding, then it can help you do that. 

What Else Shall I Keep In Mind?

First of all, you should remember that a personal guarantee is a legally binding document that the lender can enforce in court if things go wrong. You can find yourself in a tricky situation with burdensome debt repayments due to a personal guarantee. 

In addition, signing a personal guarantee is also unlikely to affect your personal credit directly so long as you make your repayments on time. However, if your company debts become too much and you fall behind on payments, you could find yourself: 

• losing your savings; 
• losing your home; and 
• with your bank account potentially being frozen. 

Terms of the Personal Guarantee

Further, you should also make sure that you fully understand the terms of the personal guarantee. A personal guarantee will usually include a ‘limitation period’ within the contract document itself. A limitation period is the length of time for which the guarantee is valid. Finally, it is important to seek independent legal advice to fully understand the implications of all of the terms of your personal guarantee agreement.

Key Takeaways

For small businesses, it can be difficult getting a lender or a bank to give you a loan. However, a loan can be important for helping your business grow. One way of making it easier to access a loan is to give a personal guarantee, which will make it easier to secure funding for your business. Doing so means that if your company defaults on its loan payments, you will be personally liable to pay the remaining amount back. Additionally, this can mean that you have to liquidate your personal assets, such as your home and other belongings. 

Before entering into a personal guarantee, you should make sure that you can afford to give one. You should also be confident that your business will do well enough not to have to resort to selling your personal assets. If you need help with a personal guarantee, our experienced disputes 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.

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