Home > Understanding Contracts > Giving a Personal Guarantee

Giving a Personal Guarantee

By: Lorna Elliott LLB (hons), Barrister - Updated: 11 Apr 2015 |
 
Personal Guarantee Financial Loan Loss

You may be asked to provide a personal guarantee in numerous circumstances throughout your life. When your child goes to university you may be asked to guarantee his or her rent, or to guarantee mortgage payments.

If you start a business and apply for funding by way of a loan or overdraft, you may be asked to give a personal guarantee in the event that the business fails. You may also be required to give a guarantee if you purchase a franchise.

Implications

You should only provide a guarantee after you have given full and proper consideration to the potential liabilities to which you will be exposing yourself. In particular, unlimited guarantees are to be avoided if at all possible, especially in relation to business.

Financial Lending Guarantees

There are several ways in which lenders seek to obtain guarantees:
  • from directors of a limited company
  • from partners in a partnership
  • from people otherwise involved in the business
  • from an external guarantor, who may not be willing to invest directly but will risk providing a guarantee. In these circumstances the guarantor is usually paid a regular fee or a one off payment which is generally between 2-3% of the total amount guaranteed.

Limited Liability and Personal Guarantees

One of the benefits of setting up your business using a limited liability structure is that in the even of failure of your business, the limited liability element will prevent directors and/or shareholders from being sued by creditors for your personal assets. However, businesses that do not have a track record may not be able to obtain credit of their own volition, hence the need for personal guarantees.

In the event that the bank demands repayment of the loan, the guarantor will be liable for the amount that they have guaranteed. If you have guaranteed an amount with one or more other individuals, you may be liable for the debt on a ‘joint and several liability’ basis. This may meant that each individual guarantor is liable for the whole amount in the event that the other guarantors cannot pay it. As previously stated it is you should beware of unlimited guarantees for the same reason. However, the Banking Code requires that guarantees for unlimited amounts should not be given in relation to bank account borrowing.

Guaranteeing Someone Else’s Business

You may think that you are being supportive to a spouse, partner or family member but all too often people sign personal guarantees without having given thought to what could happen in the event of default. Relationship break-ups, divorce and lost friendships can mean that you’re left carrying the burden for a debt that you haven’t personally incurred, in a business that you never had anything to do with. Don’t put yourself at risk unnecessarily – it would be far better to disappoint someone at the outset than put yourself, and your relationship with them at risk later when you’ve lost your assets and bitterly regret ever having signed on the dotted line.

Before You Sign

Consider whether you really do need to give a personal guarantee in the circumstances. Most financial experts advise strongly against giving such assurances. The stark truth is that if the business fails, or payments cannot be made for other reasons, you stand to lose your home. You may still be responsible as a guarantor after the business has been dissolved, or after you leave the business or resign as a director.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
@Hawkeye - I have included a CAB link here which gives some addresses and contacts which may help.
ContractsAndAgreements - 14-Apr-15 @ 1:54 PM
Looking for some advice, I bought my house 3yrs ago, it has a ten yr guarantee that will be up in 2016, I have been informed that the company that built the house has now been dissolved, can anyone tell me where does that leave me now as I have a problem that needs to be sorted.Any advice would be grateful.
Hawkeye - 11-Apr-15 @ 4:56 PM
Share Your Story, Join the Discussion or Seek Advice...
Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Latest Comments
  • confused
    Re: What If I Don't Have a Written Contract With My Employer?
    Hi, I have worked for the NHS for over 5 years doing the same job at the same place as a…
    25 November 2020
  • Bob
    Re: The Law & Verbal Agreements
    Before my mother and father died, myself and my brother were told that my brother was to get the house to live in after their…
    23 November 2020
  • Ajju
    Re: Marriage Contracts
    Any girl who can go to uk January 2021 intake. Marriage or agreement marriage... Call me 9217515985 I'm from india
    15 November 2020
  • Maan
    Re: Marriage Contracts
    Hi Please Can you help me to find a girl in uk who marry with me its permanent.
    15 November 2020
  • adnan
    Re: Marriage Contracts
    Hi can you help me find a woman to marry in uk, I'm 22 years old please help me, thank you
    12 November 2020
  • Kitty54
    Re: How a Landlord Agreement Works
    I have lived in a property for 12 years, in that time the ownership has changed but I never had a new tenancy agreement or any…
    26 October 2020
  • Zero63
    Re: Legally Binding Contracts
    We purchased a property in 2019, our neighbour purchased their property in 2017. 2 months after moving in we were embroiled in a…
    21 October 2020
  • Zero63
    Re: Legally Binding Contracts
    We purchased a property in 2019, our neighbour purchased their property in 2017. 2 months after moving in we were embroiled in a…
    21 October 2020
  • Nemo183
    Re: Title Deeds: Who Keeps Them?
    If the title deeds are owned by a company or other organisation, then the who's name appears?
    15 October 2020
  • Melnew
    Re: Contracts and Self Employment
    I have been asked by a company to join them but on a self employed basis for the first month to see i like it or they like me...…
    24 September 2020