As a business owner or director, you may be asked to provide a personal guarantee to secure funding, credit or a commercial lease. In this guide, we explain how personal guarantees work, the risks involved and the steps you can take to protect yourself before signing.
What is a personal guarantee?
A personal guarantee is a legally binding commitment that business owners or directors are often required to provide to secure a loan, lease or credit agreement. It makes the guarantor personally responsible for repaying a debt or fulfilling specified contractual obligations if the business fails to do so.
Banks, finance providers and commercial landlords may require personal guarantees to reduce their financial risk when entering into agreements with businesses with limited liability. The guarantee provides recourse against an individual if the business does not meet its obligations, for example, if it defaults or becomes insolvent.
What are the risks of providing a personal guarantee?
The risks of providing a personal guarantee include your personal assets being used to repay a debt or meet contractual obligations, damage to your credit rating and costly legal disputes.
If the business fails to meet its obligations, assets such as your savings, car or home could be at risk. Your credit rating may also be negatively affected, impacting your ability to secure finance in the future, including a mortgage.
With personal assets at stake, disagreements can arise between guarantors, directors, business owners, family members or creditors. If disagreements escalate into legal disputes, it can be costly, stressful and disruptive.
There are plenty of good commercial reasons to provide a personal guarantee, but you should always fully understand your obligations and the risks involved before signing.
Should you obtain independent legal advice for a personal guarantee?
Obtaining independent legal advice before providing a personal guarantee is strongly recommended and is often required by the lender, landlord or other creditor.
Given the risks to your personal finances, independent legal advice ensures you understand the terms of the guarantee, your obligations and the potential consequences of signing. Lenders often require ILA because it helps demonstrate that you understood the agreement, entered into it freely and had the capacity to do so, making it easier to enforce.
At Scott Bailey, our experienced business lawyers make the process straightforward. We offer appointments in person or online by video call, with affordable fixed-fee pricing.
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Can you negotiate a personal guarantee?
The extent to which you can negotiate a personal guarantee depends on the strength of your position. A small business viewed as higher risk may have little ability to negotiate. A more established business with strong financial performance, valuable assets and more funding options available may have greater leverage.
Terms you should consider when providing a personal guarantee
The terms you should consider before providing a personal guarantee include:
- Maximum liability: Whether the amount you could be required to repay will be capped.
- Duration: How long the guarantee will last and whether your liability will reduce or the guarantee will end after a specified period of repayments.
- Scope: Whether it applies to one specific agreement or covers other current and future loans, leases or credit.
- Security: Whether the guarantee is secured against a specific asset and whether any assets, such as your home, can be excluded.
- Other guarantors: How liability will be divided if there are multiple guarantors. Depending on the terms, a creditor may be able to pursue one guarantor for the full amount.
- Release provisions: When the guarantee will end. Guarantees often remain in place even if you sell your business or resign, so it is worth being clear on this.
- Enforcement: When the guarantee will become enforceable and what rights you have to challenge it.
Are personal guarantees legally binding and enforceable?
Personal guarantees are legally binding and enforceable when they are properly drafted, signed and entered into freely by someone who understands the commitment they are making.
Although there may be grounds to challenge a personal guarantee, creditors often take precautions to reduce this risk, including requiring the guarantor to obtain independent legal advice before signing.
How to protect yourself as a guarantor
When providing a personal guarantee, you should protect yourself by:
- Obtaining independent legal advice: Expert advice helps ensure you understand your obligations, the risks involved and the potential consequences, enabling you to make an informed decision.
- Negotiating the terms: Whilst this may not always be possible, you may be able to cap your liability, limit the scope or duration of the guarantee or agree that specific assets will be excluded.
- Exploring alternative funding: Other lenders may offer more favourable terms, whilst options such as grants or external investment may not require a personal guarantee at all.
- Taking out personal guarantee insurance: Depending on the policy and your circumstances, personal guarantee insurance may cover part of your liability if the guarantee is enforced.
Should you sign a personal guarantee?
Whether to sign a personal guarantee is a decision only you can make. However, seeking expert independent legal advice ensures you enter the agreement with your eyes open, fully aware of your obligations, the risks involved and the potential consequences.
Once you are properly informed, you can weigh up the benefits and risks and decide whether you are comfortable acting as guarantor.
Choosing a lawyer for independent legal advice
When choosing a lawyer, look for someone with experience advising on personal guarantees and a strong understanding of corporate and commercial agreements. They should also be completely independent from the lender, landlord, business and any other party involved.
Accreditations can provide further reassurance about the quality of a firm’s client care, compliance and practice management. At Scott Bailey, our Lexcel-accredited business lawyers have extensive experience providing independent legal advice on personal guarantees.
How Scott Bailey can help
Our specialist business lawyers make obtaining independent legal advice quick and straightforward, providing the guidance you need to make an informed decision whilst helping avoid unnecessary delays to your funding or transaction.
We offer affordable fixed-fee pricing and can provide advice online by video call or in person at our Hampshire offices. Contact us today to arrange independent legal advice for a personal guarantee:
