What is a Personal Guarantee?
A Personal Guarantee is an agreement whereby an individual, also knows as the Guarantor, agrees to satisfy a contractual obligation of another party if the original Party that entered the agreement fail to do so. An example of this is where an individual may need to take out a large loan with a creditor to fund a business, they may be a director or shareholder for, this loan could be for purchasing a building. The creditor would need a form of collateral that would protect them if the business could not fulfil its contractual obligations to pay back the loan. This is when an individual would take out a Personal Guarantee.
Unlimited Vs Limited Personal Guarantees
Unlimited Guarantees: This will allow the creditor to recover the full amount of the money borrowed plus any other damages they incur in the process if your business defaults on its loan and falls into arrears. They would be entitled to recover the money through whatever money or assets that your own.
Limited Personal Guarantees: This is a much more structured agreement as it sets out a set amount that will be recovered. This is commonly seen where a business has multiple shareholders that want to take out a personal guarantee for the business they are associated with. They will agree to be liable for the set payments, as long as they hold a 20% stake within the business. This could either be a Several Guarantee, where the amount per shareholder is an exact amount, or a Joint and Several Guarantee, whereby any of the shareholders could be liable to pay for the entire amount owed.
Why do Banks require this?
Banks will ask that a Personal Guarantee is put in place when a large sum of money is required. This is because banks require a secondary security in the event that the primary security e.g a business fails. The individual will now provide that second security to the bank, as the Personal Guarantee means they are now liable to pay the amounts owed on the loan. When banks ask for a Personal Guarantee, they will most likely confirm that if you are taking out a loan for a business you may be liable for the full amount of the loan. There are two types of Personal Guarantees, Unlimited and Limited, it is important to understand these before you agree into a Personal Guarantee.
The advantages of a Personal Guarantee
A Personal Guarantee is beneficial to the borrower as it increases their chances of being approved for a loan. It can sometimes allow them to access a larger amount of funds from the creditor that would otherwise not be accessible. This is because a Personal Guarantee can be seen as a positive thing to a creditor as it shows the individuals are willing to put their own money at risk for the sake of the success of the business.
The risks of a Personal Guarantee
By signing a Personal Guarantee, the individual is putting themselves at risk. They are agreeing to potentially lose any or all of their assets such as their house, as they have agreed to do so in the Personal Guarantee. For a business this breaches the Corporate Veil. The Corporate Veil separates a business from its shareholders. A Personal Guarantee lifts this, it means that you as an individual could have your assets, money and anything of value taken away if the business fails to meets its contractual obligations. If you have taken out a business loan with other shareholders under a joint and several agreement, you could also be liable for all of the debt if another cannot pay. The Creditor can issue court proceedings against you if you fail to pay. Its important that before signing a Personal Guarantee you are aware of the risks associated with it.
How can Jamieson Alexander Legal help?
Our solicitors can assist with any independent legal advice and are happy to have an initial call to discuss how we may be able to help.
If you would like to discuss any of the above or would like our help, please contact Holly Lockhart on 0330 460 6098 or holly@jamiesonalexander.co.uk or the Head of the Banking & Finance at Jamieson Alexander Anastasia Ttofis on 0330 460 6090 or anastasia@jamiesonalexander.co.uk
