If you have approached a bank for a loan for your business, you may have been asked to sign a personal guarantee. Alternatively, you may have offered to give a personal guarantee for someone else’s debt. In both cases, you will be required to take independent legal advice before signing.
Personal guarantees are onerous and all of your personal assets could be at risk, including your home. It is essential to fully understand the terms and conditions of a personal guarantee before you agree to it, particularly with respect to issues such as additional charges, time limits and the full extent of the guarantee.
We take a look at how personal guarantees work and what to watch out for. If you are thinking of giving a personal guarantee, our banking and finance solicitors have the expertise to give you a clear explanation of the clauses in the document and advice on the liabilities you will be taking on.
What is a Personal Guarantee?
A personal guarantee is an agreement to pay money owed to a lender from your personal assets. It could be used to secure a business loan, for a mortgage or a lease, or for hire purchase of an asset.
The document is likely to be lengthy and complex, with the lender aiming to cover all eventualities and ensure that they can collect the debt from you in any way necessary, should it be unpaid. While a contract must include fair terms, it is important to make sure that you fully understand the scope of the agreement and the level of liability you are exposing yourself to. For example, a personal guarantee could be worded to allow the lender to collect any loan from you, not just the initial sum you intend to cover.
The Different Types of Personal Guarantee
A personal guarantee may be limited or unlimited. While a limited guarantee could only extend to a specified amount or percentage, an unlimited guarantee will cover 100% of the money lent plus interest and any additional charges that the lender is permitted to make.
Issues to Consider Before Signing a Personal Guarantee
You need a clear understanding of exactly how much could be at stake if you sign a personal guarantee, including whether any future borrowing will be covered and what interest and charges could be added.
Even if the amount is limited, costs and additional expenses will usually be in addition to this sum and can be substantial.
You should be clear on how you can terminate the guarantee. While you will still be liable for money outstanding up to the date of termination, you will usually have the option of ending the guarantee and avoiding any further liability.
If you are signing with other individuals, you need to be aware that if liability is joint and several, then you will be personally liable for the whole of the money outstanding under the loan and guarantee if the others fail to pay for any reason.
Why Give a Personal Guarantee?
For business owners and company directors, giving a personal guarantee can give you access to a bigger loan than you might otherwise be eligible for. In some cases, you may also be able to secure a better rate of interest.
A personal guarantee can avoid the need to secure a loan against business assets and is generally quicker to arrange than a secured loan. It can be used by businesses that are not yet in a position to obtain any other type of loan.
When is a Personal Guarantee Unenforceable?
In certain situations, a guarantee may be unenforceable. This includes where:
- The document was not correctly executed
- The agreement is not clearly drafted
- The lender made changes to the terms and conditions and did not advise you of these, for example by increasing the loan amount
- The agreement includes clauses that are not fair, in contravention of the Unfair Terms in Consumer Contract Regulations
- The lender did not start their claim within the time limit – this is six years, or twelve years if the document was signed as a deed
Contact Our Banking and Finance Solicitors
If you have been asked to sign a personal guarantee or you are facing a claim under a personal guarantee that you have given, we will be happy to advise you. We can go through the terms and conditions with you or, if you are facing a claim, attempt to negotiate the amount paid or payment schedule with the lender.
We also deal with personal guarantee disputes.
If you would like to speak to one of our expert personal guarantee solicitors, email us at info@witansolicitors.co.uk or fill in our contact form and we will talk through your situation with you and discuss how we can help.
FAQ
What happens if you default on a personal guarantee?
Any sums demanded under a personal guarantee should be paid immediately if the request is valid and complies with the terms of the agreement.
If you default, then the lender can ask the court to make a judgment ordering you to pay. If you still fail to pay, then they can take steps to enforce the judgment. This could include obtaining a charging order in respect of your home.
Other assets can also be taken to repay the debt, such as your savings or vehicles.
If you receive a demand to pay to satisfy a personal guarantee, we can advise you of your options. We will check that the agreement is valid and enforceable. If it is, we may be able to negotiate with the lender to secure a reduction in the amount payable or to agree on a reasonable repayment schedule.
Can I limit risk under a personal guarantee?
You may be able to negotiate with the lender to agree on the extent of your liability under a personal guarantee. You could also consider personal guarantee insurance. This will usually give cover for between 60% and 80% of the loan, although some insurers may offer more coverage.
How long does a personal guarantee last?
A personal guarantee will last until the loan is repaid unless the guarantee document stipulates otherwise. If you are a company director and you have signed a personal guarantee, it will still be enforceable against you, even if you cease to be a director.
It may be possible to ask to be removed from a personal guarantee if someone else is prepared to take your place.
