I have been asked to sign a personal guarantee. What should I do?
This is a question many company directors and business owners ask, and it can be difficult to understand the risks and responsibilities involved.
In this article, Personal Guarantee Expert, Richard Ramshaw explains what a personal guarantee is, how it works and why you should seek independent legal advice before signing one.
What is a personal guarantee?
A personal guarantee is a legally binding document, usually required by a high street lender when providing a loan to a company.
It provides a lender with extra security for the loan as it allows the lender to seek repayment from not only the company, but the director’s personal assets.
What is a personal guarantee for a business loan?
A legally binding promise that makes you personally responsible for repaying your company’s business loan if the business defaults.
To give you an example, let’s say Company A wants to purchase a buy-to-let property to add to their portfolio. They don’t have the funds upfront, so they need to seek a loan from a lender, which is usually secured by way of a legal charge against the property. This way, if Company A decides to sell that property, they must redeem the loan in full in order to remove the charge.
However, what if Company A doesn’t have any trading history? How does the lender know that Company A will repay the loan?
It is usually therefore a requirement of the lender to require the directors of Company A to sign personal guarantees to the lender.
The personal guarantee provides strict obligations on each director to bind their personal assets (such as their home) so that if Company A does not pay back the loan, the lender can come after the director personally for repayment.
A personal guarantee will often stipulate that the director is effectively a principal debtor, which means they are liable for repayment as if they took the loan out in their personal name.
What is a personal guarantee on a lease?
A personal guarantee on a lease is where an individual agrees to pay all sums due under a lease (such as rent) if the principal leaseholder does not pay.
How does a personal guarantee work?
A personal guarantee acts as if you signed the principal mortgage deed. Once you have signed the personal guarantee, it allows a lender to come after you for all payments due to the lender (this includes the loan amount, interest, costs and fees). The lender does not need to exhaust all avenues against the borrower and can step around the borrower for repayment.
How long can a personal guarantee last?
Personal guarantees, at the very least, will be enforceable for the duration of the loan term. However, in most circumstances they cannot be terminated, unless you obtain a release from the lender.
What is joint and several liability?
If there are two directors who have given a personal guarantee for a company that has obtained a loan, then the lender can come after one director on their own (several liability) or both directors at the same time (jointly).
Do you need to receive independent legal advice before signing a personal guarantee?
A lender will always ask you to seek independent legal advice before signing a personal guarantee. The main reason for this is so that if the personal guarantee needs to be actioned by the lender, then you have no defence and cannot say you didn’t understand what you signed.
Contact one of our personal guarantee legal experts in Christchurch, Ringwood or Wimborne on 01202 499255.
Why do you need independent legal advice for a personal guarantee?
Not only is the advice required for a lender to have protection, but it’s also there to acknowledge that the personal guarantee contains obligations which will have a large impact on your life, which in a worst-case scenario could lead to you losing your home.
If you are looking to get independent legal advice for a personal guarantee, you can get in touch with one of our expert team on 01202 499255, or by filling out the form.
What are the risks of a personal guarantee?
The risks of personal guarantees are that, if you don’t pay the sums due, you could lose everything: your home, your car, investments and any personal assets.
It could even lead to bankruptcy. It is therefore very important to be sure that the borrower can pay back the loan that you are providing a personal guarantee for.
That is why it is vital that you seek independent legal advice before you sign a personal guarantee; contact our team on 01202 499255.
Can a personal guarantee be revoked?
No, a personal guarantee cannot usually be revoked once it has been put in place.
Can a personal guarantee be transferred?
A personal guarantee cannot be transferred by the individual who has given it, but it can be transferred to another lender.
When is a personal guarantee enforceable?
A personal guarantee is enforceable as soon as it has been signed and dated.
What happens to personal guarantees when a company is in liquidation?
When a company enters into liquidation the personal guarantee will remain in place.
Can I get a business loan without a personal guarantee?
It is unlikely that you can get a business loan without a personal guarantee, but you will need to speak directly to a lender as to what their requirements are.
Can a personal guarantee take your house?
Yes, a personal guarantee can allow the lender to take your house.
What is a personal guarantee indemnity?
Usually, under the personal guarantee, you would need to indemnify all costs to the lender. This means that you confirm you will pay all sums due, including any compensation due to the lender when enforcing such payments.
Personal Guarantee Legal Experts
Our personal guarantee solicitors have extensive experience advising directors and individuals on the obligations and risks involved in signing a personal guarantee. If you have any questions after reading this article, get in touch on 01202 499255 or by filling in the form.
We offer all new clients a free initial chat with one of our bright and experienced personal guarantee experts.
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