The risk of signing a personal guarantee, is that you, as a director, are taking personal responsibility for the loan should your business default and become unable to repay the debt.  
 
A personal guarantee is a legal commitment made by you to a third party, such as a lender, supplier, or landlord, securing a form of funding for your company, using personal assets and finances as security. This agreement puts your personal finances at risk, which can extend to assets such as your family home, savings and investments. Below are some of the common risks typically associated with signing a personal guarantee. 

• Unlimited and limited liability 
  Some personal guarantees come with unlimited liability. This means that you are committing to allowing the lender to potentially recover 100% of the debt in question, including legal fees. On the other hand, limited liability restricts what the lender can recover from you personally to the exact amount agreed upon in the guarantee.
• Bankruptcy risk 
  In extreme cases, if you cannot satisfy the debts under a personal guarantee, it could lead to personal bankruptcy. This could have long-term consequences, including restrictions on your future company activities. 
• Credit rating 
  If you fail to meet the terms of a personal guarantee, this can negatively impact your personal credit rating, making it more difficult to secure personal loans, mortgages, or other forms of credit in the future. 
• Legal action 
  Creditors can take legal action against you personally to recover the debt. This will typically start with a County Court Judgement (CCJ) and could result in bailiff action, with further legal costs that you would also be responsible for. 
• Difficulty coming out of a guarantee 
  It can be challenging for you to revoke a personal guarantee once it has been signed. If you sell your shares, or step down from your position you will still be obligated under the terms of the guarantee. 
• Joint and several liability 
  If multiple directors sign a personal guarantee, creditors can pursue any or all guarantors for the full amount of the debt. This means you could be held responsible for the entire debt, even if others have also signed the guarantee. 

What types of finance usually require personal guarantees? 

Most businesses need to borrow money for various reasons, such as expansion, seizing a gap in the market or the consolidation of existing loans. Lenders typically require a personal guarantee to reduce their risk, especially when a company has limited credit history. Below are common types of finance that companies use. In certain circumstances these lending facilities will require personal guarantees. 

• Asset Finance 
• Invoice Finance 
• Commercial Mortgages 
• Business Loans 

How can you mitigate the risks of signing a personal guarantee? 

Signing a personal guarantee can expose your personal finances and assets, if the company enters into insolvency, or defaults on the loan in question. However, despite the risks involved, below are some of the steps you can take to reduce the potential impact. 

• Seek independent legal advice 
  Before signing a personal guarantee, it’s advisable to consult with a legal expert to fully understand the implications of your obligations and how to limit your liability, 
• Time frame restrictions 
  You can look to limit the duration of a guarantee to a specific period, rather than having it open ended. This could involve a clause which automatically ends your obligation after a set time frame. 
• Negotiate terms 
  Whenever possible, try to negotiate the conditions of your guarantee. This can involve setting a maximum limit on your liability, securing an additional guarantor, or excluding specific assets such as your primary residence or retirement savings. 
• Reviewing and updating 
  Regularly review existing personal guarantees and if possible, renegotiate the terms to reduce personal liability. 
• Personal guarantee insurance 
  Consider some of the insurance options offering some protection against the risks of a personal guarantee. However, it’s important to consider the costs and limitations of these policies and if they provide sufficient coverage. 

What are the key clauses to assess when signing a personal guarantee? 

When assessing a personal guarantee, it’s important to review specific clauses which could impact you, the director, personally. 

• Payment obligations 
  This clause will usually outline your financial responsibility, which could extend to the company’s outstanding debts, or confined to a set amount. These clauses can also additionally include interest and legal costs. 
• Payment demand 
  Determine if the guarantee permits the lender to demand immediate repayment, which could lead you to paying the entire amount, even if your company is fulfilling the terms of the loan. 
• Liability caps 
  Some guarantees specify a maximum liability limit. Ensure that it is clearly outlined to help you identify what that amount is and if any exceptions apply. 
• Indemnity clause 
  An indemnity clause can extend your personal liability beyond the amount in the loan, such as covering the lenders losses or expenses. 

What happens to personal guarantees in insolvency? 

If a company enters into an insolvency procedure and you have signed a personal guarantee, it will bypass the company’s limited liability protection, making you personally liable for the debt specified. In normal circumstances, limited liability protection separates a limited company’s finances from the director’s personal funds. This means that company debt is classed as a separate entity to a director’s personal finances.  Should your company enter into a formal insolvency procedure, this does not discharge the personal guarantee. If the terms of the personal guarantee are broken, then it becomes enforceable by the lender. 

How we can help 

While we cannot provide direct advice when you are signing a personal guarantee on a loan, we can offer free, confidential advice if your company is struggling with debt, or is at risk of defaulting on a loan and help guide you through the solutions available. 

1. Speak with our initial advisers via phone or online chat. If we can help, we will arrange a free consultation with one of our consultants to discuss your situation in more depth. 
2. During the consultation, we will advise if an insolvency procedure is the most appropriate route forward or what alternative options are available. 
3. After your consultation, if there is an appropriate route forward, we will issue the relevant documentation for you to formally engage us. 

In summary 

Financing options such as asset finance, invoice finance, commercial mortgages and business loans can provide key support for companies. However, many of these lending facilities require directors to provide personal guarantees. This legally binding contract puts a director’s personal assets and finances at risk, if the business defaults or the company enters into a liquidation procedure.  

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