8th July 2024
When securing a business loan, you may encounter the requirement for a personal guarantee. This is common practice for small businesses or those with weak credit histories. Often lenders demand personal guarantees for unsecured loans, large loan amounts relative to business size, or due to internal policy and procedures. As a business owner getting to grips with these requirements is vital to effectively navigate the loan process.
In this week’s corporate and commercial blog Joanna Convey, Commercial Solicitor with Myers & Co, details what personal guarantees are, the risks associated to them, and what provisions may be included in one.
In effect, a personal guarantee is a promise from the directors of a company to a lender that, if the company is not able to repay the agreed loan, the director will be personally liable for the repayment of that loan. This means that if the company is unable to make the loan repayments,, the company director may be required to use their personal assets to satisfy the debt.
A personal guarantee gives the lender an extra way to recoup their money if the company cannot meet their obligations under the loan agreement and mitigates the risk to the lender. It is essential that you completely understand the provisions included in the personal guarantee as they should not be given lightly.
The directors might be held responsible for future debts of the company.
The personal guarantee might require the directors to enter into an indemnity, which is an agreement that the directors pay for any losses suffered by the lender.
If the company cannot meet its obligations, the lender may serve the directors with a notice for monies owed, or simply demand immediate repayment of the debt (usually at their sole discretion).
The personal guarantee should outline the extent to which the director is personally liable which might include a cap on the directors’ personal liability which acts to limit their liability.
If the directors are personally responsible for the debt using their own assets, and they cannot do so, they might face bankruptcy and disqualification from any future activities as a director.
Directors should carefully consider if their personal finances or assets are likely to change after signing the personal guarantee document.
If the directors are confident that the company will be able to repay the loan, they might consider that the risk of giving the personal guarantee to be low but regardless, a personal guarantee should not be entered into without careful consideration.
Many lenders will not offer funding to a company if its directors fail to give a personal guarantee to secure the loan. The lender may also give more favourable terms if a personal guarantee is in place.
Alternatively, if the company itself can provide security on the loan, its directors may not be required to enter into a personal guarantee.
Many lenders request that the company directors take independent legal advice to advise them on the nature, risks and consequences of signing a personal guarantee.
If you are required to give a personal guarantee, our experienced commercial solicitors can advise you on its contents. For further information, please contact Jo Convey, Commercial Solicitor with Myers & Co, on 01782 577000 or email joanna.convey@myerssolicitors.co.uk. Myers & Co has offices in Stoke-on-Trent, Staffordshire
