Guarantor Beware

Think twice before signing on the dotted line . . .

In the turbulent aftermath of the Covid-19 pandemic, the business world is considering ways to ease recovery and steady the ship into more settled waters.

Many businesses have coped with financial losses, a furloughed workforce, and the collapse of supply chains.

An option for businesses is to turn to lenders to help bridge the gaps left by lost revenue and reinvigorate trade once more. With more cautious lending now the norm, businesses may find that in order to secure a much needed business loan, the officers of the company are asked to sign a Personal Guarantee to give the lender added comfort.

In basic terms, a Personal Guarantee is a promise made by an individual to a lender to pay back monies owed by a company in the event that the company cannot repay the debt. Generally under the terms of a Personal Guarantee, the lender can seize and sell the individual’s personal assets (including, in some instances, their family home) to recover the losses.

Personally guaranteeing a loan for your company can be necessary, however, it has many serious ramifications.

So what are the key considerations?

1. A Personal Guarantee is just that, its “personal”. If your company does not pay back any debt that you have guaranteed, the lender can treat it as your debt. Unless you have a comfortable amount of assets, you could be putting your financial future at risk.

• If there is more than one individual securing the lending, generally the Personal Guarantee will make the individuals “joint and severally” liable for the amount. This means that if the company defaults. the lender can pursue one of the individuals for the whole debt if it chooses to do so, despite there being a number of other individual guarantors. “Strength in numbers” is certainly not the case here.

• If a Personal Guarantee is unlimited, there will be no cap on the amount that the lender can recover from the individual. This means that if a significant sum is owed, your savings accounts, car, investment properties and even your home could all be fair game.

Practical steps
Is there any other way that capital can be raised without placing individuals at risk? Can an asset of the company be offered as security instead?

Are you considering agreeing to a Personal Guarantee to assist your company in raising funds? Are you considering requesting a Personal Guarantee from the directors of a company to which you are providing credit? Sewell Law has the expertise to assist.