Giving a Personal Guarantee
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.
ImplicationsYou 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 GuaranteesThere 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 GuaranteesOne 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.