What is a Personal Guarantee?
You may be considering signing a personal guarantee (also known as a PG). This is an agreement between you as a business owner with a lender, outlining personal liability for repayments should your business become unable to meet them.
They can be used in a number of situations, including:
- Company loans
- When asset-based security is unavailable
- Loans/hire purchase agreements
- Guaranteeing repayment by third parties such as children, family members of friends.
What are the risks when signing a Personal Guarantee?
A PG acts as a surety for third-party debt. They are attractive to lenders as they offer an alternative method of payment recovery; thus, reducing lending risk.
However, this may place you in a vulnerable situation. Your personal assets – including your home – may be at risk if you sign the personal guarantee. The liability to honour the guarantee is yours alone, regardless of the borrower’s ability to pay.
It is recommended that if you provide a personal guarantee, you limit the amount you are guaranteeing by value and/or time.
If you fail to address this, your liability may be unlimited, meaning that any further lending provided may be covered by this guarantee. For example, you could provide a personal guarantee for a £50,000 loan, but with further borrowing of £200,000 over a number of years you may be liable for £250,000 plus interest and legal costs. This is likely to affect the likelihood of signing such a guarantee in the first instance.
Advantages
You may secure lending with a better interest rate than without a guarantee and if the borrower repays the debt, then the guarantee will not be relied upon.
Furthermore, you may not have any assets of value and therefore there is little risk of loss by providing a guarantee. Please take into consideration that this may change over time, making you a financially viable target at a later date.
Disadvantages
The main disadvantage of signing a personal guarantee is simple: if the business in question becomes unable to pay their debt, you become personally liable. The lender would become able to pursue you personally in order to recover the debt, leaving your assets, including your home, at risk. Because of this, care should be taken to fully understand the terms of any personal guarantee before it is signed. You may therefore consider alternatives such as a higher rate of lending to avoid the personal guarantee.
You should always seek professional legal advice before signing such a document and we recommend that you inform any lending broker that you require a product that excludes personal guarantees wherever possible.
This article does not contain legal advice. If you have been asked to sign a personal guarantee and require further information, please do not hesitate to send us a message or call a Bailoran expert on 0113 266 0735.