Personal guarantees: a concise guide
The majority of small businesses will be hoping to expand – but growth doesn’t always come cheaply. That’s why so many businesses will be looking for some much needed cash to achieve their goals.
If you’re in this boat, then you may have come across the term ‘personal guarantee’ in your search for funding. It’s a fairly common requirement in the business funding application process, and could be your ticket to getting the money you need.
But what is it? How does it work? And what are the risks involved? Read on to get a grasp on personal guarantees, and see if it could be right for you.
What is a personal guarantee?
A personal guarantee is a promise made between a business owner or executive and a lender. When a personal guarantee is signed, the individual is promising to be responsible to pay back the loan should their business ever be unable to make the repayments.
This guarantee provides an extra level of security for the lender – meaning they may be more willing to issue credit with a back up plan in place, in case the company goes insolvent.
It's a risky business, as if things don’t go to plan you could be personally pursued to cover the debt with your own assets. But, if you have confidence in your business, the payoff could be worth the risk.
Some of the most common scenarios where a lender may request a personal guarantee include:
Personal guarantees by directors
A personal guarantee by director means that the director of a company is personally liable to repay the debt when their business is unable to.
For a company director to enter this agreement, it usually indicates that they have great confidence in their business. Despite agreeing to be personally responsible, they will assume that they will never actually need to use their own personal assets to repay a loan.
But even if you have confidence in your business, agreeing to a personal guarantee is a significant decision which should never be made lightly. After all, most businesses are affected by unexpected peaks and troughs, so there will always be a chance (even if it is small) that repayments need to default to the guarantor and their personal capital.
This method, however, can help to unlock funds which may otherwise be unattainable. But to access it, you risk blurring the lines between personal finance and business finance – something which most would prefer to keep separate.
Personal guarantees on business loans
Small businesses are riskier to lend to, and as a result may find it difficult to get an unsecured business loan. However, by agreeing to a personal guarantee, you could be improving your chances, as it’s an extra layer of reassurance for the lender that the debt will be repaid.
Just like a standard business loan, the business will need to pay it off. But, if this falls through, the individual will be responsible for paying up.
Personal guarantees: advantages
Agreeing to a personal guarantee is a hard decision to make. It’s definitely worth considering though, as it can bring opportunities which may have previously been out of reach.
Better chance of getting funds
By committing to a personal guarantee, you’re offering more security to the lender. This could be the incentive they need to lend you money.
Achieve your business goals
Signing a personal guarantee can help get the money you need to support your goals, such as your next stage of growth. If you’re being turned down elsewhere, this could be one of the few ways to help realise your business’ potential.
Personal guarantees: disadvantages
Understanding the potential consequences should also form a big part of your decision making:
Even if you’re confident your business will be able to keep up with the repayments, things may not work out that way. In business, the unexpected can happen, and with little warning.
It’s a personal burden
If your company becomes insolvent, it will be your responsibility to step up and make the repayments yourself. And if you’re not in a situation to comfortably do so, this can result in long-lasting financial problems, such as bankruptcy.
Personal guarantees FAQs
Is a personal guarantee legally binding?
Yes – as soon as a personal guarantee is in writing and signed by the guarantor, then it becomes an enforceable contract.
In the event of a company’s insolvency, the individual will be given a timeframe to pay the outstanding payment. If this isn’t met, then there may be legal proceedings against you.
How long is a personal guarantee valid?
As long as stated in the contract. It may also become unenforceable after a limitation period, after which the creditor won’t be able to claim. But again, this will be dependent on the contract.
Every personal guarantee is different – so it really is important to make sure you understand the agreement and get legal advice before signing on the dotted line.
Are business credit cards personally guaranteed?
When taking out a business credit card, you may be asked to sign a personal guarantee. This will particularly be the case for small businesses, as the credit card issuer is taking more of a risk.
However, this won’t be the case every time. There are no-personal-guarantee business credit cards available, so it would be worth doing your research.
Does a personal guarantee affect credit?
Signing a personal guarantee shouldn’t affect your personal credit if all the repayments are made on time. However, this might not be the case if your business falls behind on the repayments. In this situation, you’d be liable to pay the debt. This could result in a loss of savings, loss of your home and your bank accounts being frozen. If these personal assets aren’t enough to cover the outstanding debt, you may be made bankrupt, which would of course negatively impact your credit rating.
More on loan security types:
- Borrow up to £500,000
- Repay early with no fees
- From 1 day to 24 months
- Applying won't affect your credit score
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