For a business owner or director, entering into a personal guarantee and placing your personal assets at significant risk can be a daunting prospect, which is why it’s crucial to be aware of some of the factors surrounding this form of legal agreement. 

In this article, our experts explore the main 8 things you should consider before you sign on the dotted line.  

-    What is a personal guarantee? 

A personal guarantee is a legal agreement in which a business owner or director agrees to take financial responsibility for any credit, typically a loan, on behalf of their business. 

This means that the guarantor is prepared to use their personal assets, such as their savings or property, as collateral if the business defaults on loan repayments.  

The main benefit of a personal guarantee is that it can help business owners to secure a loan that they would not have otherwise had access to, as lenders are more willing to lend money with a personal guarantee in place, providing them added security.

While securing a loan through a personal guarantee creates an opportunity for business expansion and growth, it does present a significant risk to the business owner or director, who will be held personally liable for any outstanding debts in the event of insolvency. 

With that in mind, here are the 8 key things you should consider before entering into a personal guarantee: 

-    Who can enter a personal guarantee? 

Typically, a personal guarantee is signed by key individuals involved in a trading business, including business owners, directors and shareholders, who are seeking financing for their company.

-    When to enter a personal guarantee

Lenders can request a personal guarantee when a company has applied for business finance, such as a loan, invoice financing, overdraft facility or funding for property purchase.

This is especially common for SMEs who need funding but may not have the collateral. A personal guarantee increases your chances of securing funding because it reduces the risk to lenders if the company defaults on the repayments. 

-    Joint and several liability 

A personal guarantee can be signed by multiple people, if required. This means that where there are multiple guarantors, each of them shares personal liability to the lender. 

The reason for this is that if one guarantor is unable to pay, the lender can pursue the assets of the remaining guarantors to receive the whole amount. 

-    Bank standard terms and legal advice 

The terms of a personal guarantee agreement are set by the lender and the scope for negotiation is often limited. 

For this reason, it’s wise to seek independent legal advice to ensure that you have a clear understanding of the terms of your agreement, including the extent of liability and the potential risks.

An independent solicitor must then provide proof that the guarantor is entering into the agreement freely and without undue influence, which involves a written confirmation after a face-to-face meeting. 

-    Limited or unlimited liability 

This refers to the maximum amount the guarantor is required to pay if the personal guarantee is enforced and can be limited or unlimited. 

It is based on a number of factors, such as the level of debt, the type and terms of the credit, and the availability of other forms of security. 

Any other amounts that may be required to be paid under the personal guarantee include interest, expense and default interest, which are not included in the capped limit and will be payable above it. 

-    How to terminate a personal guarantee 

The procedure for terminating a personal guarantee is usually set out by the lender before you have entered the agreement so that you are fully aware of your options. There is also usually a condition that the guarantor may terminate or fix their future liability through a written notice to their lender. 

However, the guarantor will remain liable for the amount that has been incurred up until that period. This will also have an impact on the business, which will be required to offer alternative guarantees as security. 

If the loan has been repaid, the guarantor is then entitled to make a request to the lender to be released from the agreement and discharge the assets granted to secure it. 

-    When is a personal guarantee enforced?

There are certain circumstances where a lender can enforce the personal guarantee. If the business goes insolvent and defaults on the loan, or it fails to comply with the conditions of the loan, the lender will turn to the personal guarantee in order to recover the full amount owed. 

In the event of the guarantor being unable to pay the sum that was guaranteed, the lender can call on any of the personal assets used as security, as well as apply to the court for the sequestration of the guarantor. 

-    How to protect yourself when entering a personal guarantee

No one wants to think about the possibility of their business experiencing insolvency, but with a personal guarantee presenting a significant risk to you, it’s always better to be prepared. The best way to protect your personal assets is to take out personal guarantee insurance (PGI). 

-    Personal guarantee insurance from Purbeck 

At Purbeck, we understand the risks involved in signing a personal guarantee. That’s why we created our personal guarantee policy that allows you to invest in your business while minimising risk. 

Purbeck are the UK’s leading provider of PGI, with policies that cover up to 80% of the assets used for your personal guarantee. 

If you have any further questions about our policies or would like to protect your assets and secure funding for your business with the peace of mind that your personal assets are safe, don’t hesitate to get in touch with a member of our team today.