What is a Personal Guarantee? – A definition
Loans11th February 20190 CommentsLeyton Jeffs
When you provide a personal guarantee to a bank or another loan lender to a business, you’re agreeing to act as guarantor for a proportion, or all of the debt obligations of your company.
That means if your company defaults on a loan repayment, you’ve guaranteed that you’ll step up and pay instead.
Your obligation is secondary to the primary one between the borrower and the lender, so if your company doesn’t have any repayments due then you won’t be asked to pay
Two basics to bear in mind with a personal guarantee agreement.
The guarantee should not be an indemnity – which is an obligation to pay further damages to reflect a lender’s loss and not just the principal. I’d normally expect to see an indemnity in cases where there is an operational risk of fraud (ie an invoice finance facility). When examining the detail of a personal guarantee, it’s important to understand if you will be acting as an indemnifier, a guarantor, or a mixture of the two.
Also, your personal guarantee may or may not be supported by tangible security, which could be a charge over your own home or another asset, and would potentially make it easier for a lender to enforce in the event of the borrowing not being paid.
Key personal guarantee considerations on a loan,
- A personal guarantee will not be enforceable unless it’s in writing and signed by the guarantor.
- Negotiations with a lender will be tricky – seek expert help early on.
- Consider negotiating capping the value of the guarantee before signing it.
- How does your contract suggest creditors will enforce the guarantee? – Will they serve notice or can they seek payment on demand?
- What exactly will constitute a default?
- Do terms allow for any remedy period?
- Does your contract provide that creditors exhaust every other avenue before making demands on you?