You may be considering becoming a personal guarantor to secure a loan for your business. The personal guarantee agreement holds you as a company director personally responsible if the monies borrowed are unable to be repaid.
This may appear like an attractive offer and is often a requirement from lenders. However, you need to consider if this is a risk that is worth taking. While you are financially secure and the business is going well, it may appear to be a small risk that enables you to expand your business. But if things start to become financially difficult, you are the one who will be facing having your assets seized if payments can’t be made.
So before you become a personal guarantor, we would like to help you to understand the basic legal implications of the contract and the consequences should the guarantee be enforced.
What is a Personal Guarantee?
A personal guarantee is an agreement that means that the director of the business acts as a guarantor for loan debts. This means that if your company defaults on a business loan, you will pay it out of your personal financial assets. However, your obligation is secondary to the borrower/lender one and will only be enforced if your company defaults on payments.
It should be noted that a personal guarantee is not an indemnity and you have no obligation to pay further damages that reflect the lender’s losses. So make sure that you are clear in the contract that you are acting as a guarantor, not an indemnifier or a mixture of both.
According to Moyen from Integra Solicitors “Your personal guarantee may be supported by security such as your home. This would make it easier for the creditor to seek enforcement in the event of a default on the loan and is often what lenders require for you to act as guarantor.”
One thing we would highly recommend is arranging a cap on liabilities prior to signing the personal guarantee agreement. This means that you are protected should the company find itself in financial difficulty somewhat. It is far more difficult to negotiate a cap into an agreement once the company has hit a financial challenge.
What Are The Advantages of a Personal Guarantee Agreement?
If you are willing to enter into a personal guarantee agreement, you will probably greatly improve your chances of getting finance. For small and medium-sized businesses this is often a significant incentive for getting some much-needed cash injected into the business.
Often for SMEs, the injection of capital could mean the difference of staying afloat or going under. It is also often the only way that these businesses can hope to expand in any way. To have a small business loan may be the only way that a business can reach its full potential.
However, as the company director, you need to consider whether you are ready to take on the risk of creditors coming after you personally if your company defaults on any payments.
What Are The Disadvantages of a Personal Guarantee Agreement?
Under normal circumstances, creditors cannot pursue company directors for debts accrued by the business. However, if you have signed a personal guarantee, this opens up the possibility of your own personal financial position being negatively impacted as creditors seek to recoup losses from you.
It may seem like an unlikely event at the time of considering acting as a guarantor, but these situations can arise all too quickly and you may find yourself in a position of having to sell your home to pay off company debts.
The other consideration is how this will negatively impact on your own financial stability. Should you become responsible for paying the loaned amount back, you will find your own credit suffering and may even face bankruptcy. Lenders may also pursue you for payment even after you have ceased working as a director for that particular company.
Other Considerations
Before committing to becoming a personal guarantor for your business, it is worth considering if there are any other viable options. Could you raise the funds another way that doesn’t require you to give a personal guarantee?
Make sure you protect yourself as much as possible if you do enter into a personal guarantee agreement. Talk to a legal professional about negotiating the terms of the agreement and seek professional financial advice.
Some agreements will have you more personally liable than others, so make sure you are fully informed about your personal responsibility. Demand clarity about where your responsibilities start and end.
There is some scope for directors to negotiate themselves out of a personal guarantee, but it is a complex process and requires the cooperation of the lenders. So it is advisable for you to protect yourself before entering into an agreement.
These days there are insurance policies available to help protect directors against the potential pitfalls and give a better balance of risk.
Professional Guidance
Here at Integra Solicitors, we can help you navigate your way through personal guarantee agreements. Advise you on insurance policies available and ensure that if you decide to enter into a personal guarantee agreement, you are protected as much as possible.
We will offer impartial advice with regard to your options and financial obligations. If you are considering entering into a personal guarantee agreement, or need help understanding your rights with an existing one, then contact our offices today to speak to one of our professional legal team.
