30th June 2022
What does it mean to a business owner or director to become a personal guarantor on a business loan? What are the advantages and disadvantages and what might the consequences be in the current economic climate?
A personal guarantee
A personal guarantee is a legally binding legal agreement between a business owner and a lender. It is a form of security offered to the lender.
A personal guarantor is the person who signs the agreement to say they take responsibility and are liable for paying back a loan if the business can no longer make payments. The guarantee is usually signed during the loan application process.
Who can be a guarantor?
Almost anyone can be a guarantor, and this very much depends on the agreement. Individual lenders will have their own criteria, their position within the business requesting a loan (they are usually a director or partner of the business), a lower age limit, or the assets they own; for example, whether they are a homeowner. The lender will also be interested in the guarantor’s credit history.
Before signing a guarantee agreement, it’s necessary to understand its contractual terms, which can vary widely depending on the consequences and the parties involved.
A guarantee can clearly refer to a particular loan only and the lender can’t make a claim against the guarantor for any other loan facility provided by the lender.
However, if the guarantee refers to “all monies” given by the lender to the borrower at any time, then the guarantor is liable for a failure to repay any loan made by the lender.
There are many good reasons for a company director or business owner to become a personal guarantor. It can be a way for SMEs to unlock the door to a critical business loan or a line of credit by offering extra security.
However, the guarantor is assuming that the lender won’t have cause to call in their loan in a way that affects their personal, or family, assets. For this reason, it’s important, before entering into a guarantee agreement, to consider the implications for them and their family, very carefully.
While a personal guarantor doesn’t expect the worst to happen, in the current economic climate, it can’t be ruled out. If payments on a loan are not kept up, the personal guarantor is expected to use their personal funds to make up the payments.
A creditor may be able to seize their assets, including their family home, personal savings, assets held jointly, as payment, with severe effects on the financial state of the guarantor.
However, should the worst happen, there’s always room for negotiation, although it’s not likely to be easy and it depends on the stance of the lender.
Debt problems are never improved by delaying action or keeping them to yourself. Early, honest communication, with the support of a professional debt mediator, can make all the difference in coming to an acceptable agreement for all sides.
Talk to James Rosa Associates
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Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.