Personal guarantee

Personal guarantee’s holds a company director that has taken some sort of business finance out from a lender, personally liable if the business is unable to repay money owed. A personal guarantee agreement is typically a requirement when taking out a business loan.

If you’re in need of a cash injection so that your UK-based business can continue to grow, you should be aware that you’re certainly not alone. A business survey has discovered that 27% of all SMEs that took part in the British Business Bank survey 2018 were financed by loans in some way.

With everything that has happened in 2021 and all the troubles that have been brought on with Coronavirus, business loans have become more important than ever before.

There can be any number of reasons why a company director might be willing to provide personal guarantees in support of a business loan, property lease or line of credit.

What is a personal guarantee?

A personal guarantee is a term personal guarantee refers to an individual’s legal promise to repay credit issued to a business for which they serve as an executive or partner. Providing a personal guarantee means that if the business becomes unable to repay the debt, the individual assumes personal responsibility for the balance.

Personal guarantees provide an extra level of protection to credit issuers who want to ensure they will be repaid in full and on time. By signing a personal guarantee you’re giving your creditors confirmation that they’ll be receiving the required repayments from you, hence making it a more likely outcome that you’ll come away with the funding your business needs.

How long does a personal guarantee last?

A personal guarantee is a contractual agreement in which an individual agrees to be held personally responsible for the debt or obligations of another party. In most cases, personal guarantees are used when extending business loans to new or small businesses.

The personal guarantee shows the lender that the borrower is committed to repaying the loan, even if the business itself is unable to do so. personal guarantees typically remain in effect for the entire term of the loan, and borrowers are usually responsible for any interest and fees that accrue during that time. In some cases, personal guarantees may also be extended to cover additional debts incurred by the business during the term of the loan.

But is it a risk worth taking?

Directors personally guaranteeing their company’s debts might seem like an attractive option in times of financial security, but these guarantees come at a cost. When business is good and the board needs little input from them on how to improve its growth or improve cash flow; they’ll be more likely than ever before with this guarantee by director obligations secured solely off personal equity-especially if it has already been built up via other sources such as savings accounts, but what happens when things go south?

When you sign up to be a business loan guarantee, it’s important that know the legal basics of your contract and what will happen if things go wrong.

Two basic features of the personal guarantee to bear in mind:

Firstly when you are asked to provide a guarantee on something, it is important not only that the terms and conditions of your contract reflect this but also how much liability will be placed upon yourself. A personal pledge shouldn’t include an indemnity – which means paying damages in order for someone else’s loss be compensated- so make sure there isn’t any language concerning these obligations before signing!

Secondly your personal guarantee is a risk because it may be opposed by security, which could lead to charging over your home. If you fail to make payments on time or choose not pay at all then the creditor would have greater enforcement options in case of borrower default. You may want to explore about guarantees concerns whether they are supported with collateral and if so what this asset might be – usually something that’s attached directly onto the guarantor home or land etc. Once again there’ll likely come down ultimately haywire when entrepreneurs try taking out business loans against themselves.

Key Considerations

Gordon Ramsay’s guarantee was not enforceable in any terms unless it was written and signed by him. He fell foul of this when his father-in law operated the signature machine for him, but luckily he got out before anything happened that could’ve jeopardised all those delicious deals! The High Court ruled that because the father-in-law had acted as an agent throughout their long standing business relationship with you, these guarantees are likely to be treated unconditionally.

You should always think about negotiating with creditors when they come after you for the money. It’s unlikely that any negotiations will go smoothly, and if your company’s financial situation is drifting towards insolvency then this becomes even more true – so consider early on in order to get a better sense of what can be done.

The drafting stage is where you should consider capping your liabilities. It’s not always possible with all lenders, but if it can be agreed upon then this will mitigate losses and give reassurance for both parties involved in the contract agreement process.

Ensure you’re comfortable with all the terms of the guarantee

• Ask how will the lender enforce the guarantee?

• Will they seek payment on demand or go to serving notice?

• What constitutes a default in the contract?

• Is there a remedy period in the terms and conditions?

• Who will value your net assets assessed prior to the giving of the guarantee?

• Will the contract request that the lender exhaust every other avenue before making demands on you?

Worth Taking the Chance?

The personal guarantee is a great way to ensure that your company’s financial obligations are met. You can be as specific or vague with these guarantees, so it works well in all kinds of situations! The financial prospects of your business and its commercial value are important considerations when deciding whether or not to take on the risk.

The right to an indulgence is not something that can be taken lightly. Creditors have been known for being very strict about their rules and enforcement, so challenging them will likely never just happen out-of-the blue with no consequences or negative outcomes involved in doing such a thing.

Does PDQ Funding take personal guarantees?

At PDQ Funding, we pride ourselves on offering a diverse array of financial products to cater to your specific needs. This selection includes the flexible line of credit, business loans, and loans covered by the Government’s Recovery Loan Scheme (RLS).

To ensure the security of investments and financial transactions, it’s worth noting that personal guarantees are a requisite for all PDQ Funding business loans, as well as for lines of credit exceeding certain thresholds.

Additionally, in situations where we may not directly provide assistance, we maintain a network of esteemed partners ready to step in and offer their support. It’s important to note that the personal guarantee requirements with these partners can vary depending on the specific product and the provider involved.

If I miss a loan repayment, will my personal guarantee be enforced?

It’s essential to recognize that a single missed payment doesn’t automatically trigger a claim against a personal guarantee. Nevertheless, the repercussions of missing payments can encompass a dent in the business’s credit score or the accrual of additional costs. If you find yourself in a situation where you anticipate missing a payment or have already done so, it’s advisable to promptly reach out to our dedicated in-house customer support team.

It’s important to emphasize that loan default is a measure of last resort, and we may resort to it if the terms of the loan contract have been violated, and we determine it to be in the best interest of our investors. We always aim to work collaboratively with our borrowers to ensure successful outcomes.

What are joint and several personal guarantees?

A joint and several personal guarantee signifies that all individuals acting as guarantors bear both joint and individual liability for the entire debt amount. To illustrate, if there were three guarantors, each of them would assume full responsibility for the entire debt linked to that loan. In a scenario where two out of the three guarantors fail to make payments, the remaining guarantor would be obligated to settle the entire outstanding balance of the debt. This arrangement ensures that the burden of repayment doesn’t rest solely on a single guarantor’s shoulders, fostering shared responsibility.

The pros and cons of a personal guarantee

The following is a quick run-through of both the pros and the cons of a personal guarantee agreement that you may wish to take into consideration before pursuing one yourself:

Pros

• Lend a higher amount of money
• Chance to expand your business
• A good option for new businesses
• Decreases risk and increases security for the lender

Cons

• Personal repercussions – you could lose your house, your car and other personal assets
• If your assets fail to cover the loan repayments – you could be made bankrupt
• If you can’t pay the loan back, you will have to seek court permission to become a company director in the future

Personal guarantee insurance

The cost of a personal guarantee will depend on how big the asset is that you’re guaranteeing, and what assets are being secured against your loan.
Banks often require people who take out asset based lending or business finance to sign guarantees as well – these can be costly if they go wrong! With this in mind you should be aware that the insurance will never cover the entire amount of the guarantee.

Knowing your assets are on the line if the business loan repayments default is an extremely worrying possibility to think about. If you take out insurance you can cover up to 80% of the total loan amount and give yourself peace of mind that your assets won’t be up for grabs. The safer you are about proceedings, the less you’ll have to worry about throughout the entire process.

What happens if you default on a personal guarantee?

When you sign a personal guarantee, the lender will send an letter containing their payment terms. You should check them against your loan agreement and if they don’t match or meet all of its requirements then contact us immediately! We can help get this fixed before any legal proceedings start against you which may lead to bankruptcy.”

Talk to an expert in finance

If there’s an accountant you can talk to we’d highly advise discussing all your future plans with them and just generally getting their take and opinion on the situation as a whole. By getting the opinion of someone who is an expert in the field, you’ll be covering your own back and protecting your business from falling into any nasty mistakes that will prove to be costly in the near future.

In summary

All in all you need to assess your options carefully and take the best interests of your business into consideration, rather than simply your own. During difficult financial moments where finances are tight and hard to come by, it can be easy to rush into something that proves to be a mistake and make some rash decisions. Don’t fall into this trap, keep your options open while ever you can and contact an expert to help see you through. Remember, the more information you have access to, through both your own findings and the thoughts of others, the better your judgement will become.