When starting up a business, it is quite common for the bank to request personal guarantees from the directors, and / or shareholders, of the business as additional security for the company’s borrowings and loans since the new business does not have a credit record. Because it is quite a common request, many business owners will sign a personal guarantee without a second thought.
Says Alistair: “A personal guarantee can have a very serious impact on a guarantor’s personal wealth and future security and should always be considered in conjunction with experienced legal advice.
“A personal guarantee is usually given for a set amount, plus interest, and is payable on demand to the bank should the company default on a loan agreement. A personal guarantee will allow a fledgling company to borrow money without additional charges on the business or its assets however, it also means that the bank can demand full payment from the guarantor in the event of any default.
“Should the guarantor be unable to repay the bank in full, a bankruptcy order can be made against the guarantor and they could be forced to sell their assets to repay the amount owed.”
Business owners who sign personal guarantees without legal advice, often do not realise that it is a ‘continuing security’, which means there is no agreed termination or end date to the guarantee.
Alistair continues: “The guarantor cannot terminate the guarantee unless they are in a position to repay the whole outstanding loan amount that the guarantee is set against. Additionally, in some cases, banks will not want the guarantee cancelled unless they have equal, or greater security from elsewhere. Without the bank’s written confirmation of the termination of the guarantee, the guarantor may continue to remain liable for the loan amount, even if it is paid off in full.”
Do not assume that signing personal guarantees as co-directors will equally spread the burden of the liability. In the event of default it is likely that the bank will pursue the director with the perceived greatest assets.
Alistair finishes: “We always advise clients who are considering signing a personal guarantee to take legal advice first. Before they sign they must fully understand their total liabilities under the agreement and be comfortable with the consequences. An experienced solicitor will be able to limit the guarantor’s liability under the personal guarantee, or may be able to suggest alternative security for the loan.”