Maung Aye

As economic expansion levels off due to consistently high interest rates, both businesses and consumers are grappling with the strain of loan repayments. To gain financial support and instil confidence in lenders, business owners might contemplate resorting to giving personal guarantees.

What is a personal guarantee?

A personal guarantee involves an agreement between a business owner or director and a financial institution, usually a bank, building society, or credit union. It asserts that the individual will assume responsibility for repaying a business loan in case the business cannot fulfil the repayment.

This guarantee might accompany a secured loan, where assets like money or property serve as collateral, enabling borrowers to access larger loan amounts.

Although applicable to various commercial loans, personal guarantees are also given to support mortgages for commercial landlords or substantial loans. Lenders might request full or partial coverage through a personal guarantee, depending on the circumstances.

Understanding the risk

Lenders often require business owners to seek independent legal advice before committing to a personal guarantee. This requirement safeguards the lender by demonstrating the individual’s comprehension of potential financial liabilities.

While personal guarantees can expand business opportunities, they can carry substantial legal risks to individuals.

The risks involved in a personal guarantee can include:

  • Personal asset loss, including a family home
  • Potential bankruptcy and disqualification as a company director
  • Immediate loan repayment in certain circumstances, at the Lender’s discretion
  • Additional costs if individuals are held accountable for the lender’s losses
  • Damage to personal credit rating

To mitigate these risks and safeguard personal assets, a thorough understanding of the legal aspects of a personal guarantee is vital. Key elements to understand include:

  • Liability: Determining whether the guarantors share joint or joint and several liability for the loan.
  • Amount Due: Clearly stipulating the specific amount or percentage that individuals have to repay.
  • Enforcement Costs: Clarifying how the creditor will execute the agreement and guarantors enforcement expenses.
  • Asset Protection: Identifying which personal assets could potentially cover business debts, possibly safeguarding essential assets like a family home.
  • Renegotiation Option: Exploring whether the agreement allows renegotiation or removal of the guarantee if the business performs well.

Engaging legal counsel before signing is crucial to understanding and mitigating personal financial risks. We can assist by reviewing personal guarantees, negotiating better terms and monitoring personal risk.

For more help or advice on related matters, please get in touch with our Corporate Partner, Maung Aye, on +44 (0) 20 7240 0521 or at maung.aye@mackrell.com

 

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