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A personal guarantee is a promise, given by an individual, to ensure that a third party fulfils its obligations and/or a promise to fulfil those obligations if that third party fails to do so.
The individual who signs is a personal guarantee is therefore responsible for paying back a loan should the business ever be unable to make payments.
There are a number of scenarios when a personal guarantee would be used, for example:
- Business loans
- Property mortgages and leases
- Asset leases
Small business owners or company directors normally make a substantial initial investment using their own capital in order to get their business up and running. One of the reasons why they offer personal guarantees is to get credit from Banks and other lenders. As they have a vested interest in the launch and development of their businesses, business owners (and other individuals) offer a personal guarantee to provide an extra level of protection to credit issuers who want to make sure they will be repaid.
Personal guarantees may also be supported by additional security. The common example is giving the lender a charge over the guarantor’s personal home, which gives them more comfort that there’s tangible value behind the guarantee should the company or the guarantor be unable to provide payments.
The positive of giving a personal guarantee is that it could improve the company’s chance of gaining finance from a lender, which it may not have had a chance to getting prior to giving the guarantee.
A negative is that, if the business defaults on the loan, and the personal guarantor cannot pay either, it is likely the guarantor’s assets will be given instead.
However, it may be possible to minimise the risks through taking out insurance, or negotiating out of the guarantee – but the process is difficult.
If you or your business require information regarding anything in this blog or generally about your business or any other corporate matter, please call Sarah Ward, head of our corporate team, on 07889 589596 or e-mail Sarah at sward@georgegreen.co.uk for advice and assistance.