Personal Guarantees

What is a Personal Guarantee?

A personal guarantee is a legal obligation made by a director of a company, stating that they will be responsible for repaying the outstanding balance owed to the creditor if the primary borrower, the company, is unable to do so. Personal guarantees are often used for business loans and asset finance to provide an extra layer of security to credit providers so that they can ensure that they will be repaid the monies they have lent the company.

By pledging their own assets, the director becomes a cosigner on the credit agreement and, should the company become unable to pay, the creditor will have a claim against the debtor’s assets.

Personal guarantees can also help companies to get credit when they are not yet established, or have a poor credit history.

Before Making a Personal Guarantee

When asked to give a personal guarantee, it is advisable to seek independent legal advice to check what is included within the guarantee. There are two types of personal guarantee: limited and unlimited. 

A limited guarantee is a promise to pay a capped figure of an outstanding balance, if the credit provider is not paid in full by the Company. For example, while a company’s overdraft facility may be £100,000, a director may have given a guarantee capped to only £50,000. Conversely, an unlimited guarantee would enable the credit provider to pursue the business owner for the full outstanding balance.

Additionally, legal advice can help to clarify the terms of the agreement. For instance, if the guarantee refers to a specific credit obligation/facility and that obligation has been repaid, the lender would not be able to make a claim against the signatory for other amounts owed to them, unless additional guarantees have been made or the wording of the guarantee stated that the agreement was all monies i.e. covers any lending provided.

Repayment Options

If you have signed a personal guarantee and are unable to cover the costs of the outstanding balance, there are a range of options available to assist you with repaying the loan.

It is recommended to be transparent and maintain good communication with the creditor, as this will help retain a sense of goodwill between both parties, and opens the door for payment plans to be agreed.  Once the lenders are aware of the situation, you may be able to negotiate monthly installments or repaying a reduced sum in one go as a full and final settlement. 

If you are unable to make any payments, you may be able to apply for a Debt Relief Order (DRO) if the amount owed is less than £30,000, you do not own your home, and you have a disposable income of under £75 per month. If you are successful in obtaining a DRO, you will not have to make payments towards your debts for 12 months.  However, there are certain rules that must be followed during this time; including an obligation to inform any creditor, or bank, should you wish to borrow over £500 or open a new account. Anyone with a DRO will also be unable to act as a director of a company. 

Alternatively, you could apply to court for a short-term Breathing Space to freeze most debts, offering the opportunity to either seek advice or wait for ongoing difficulties to pass so that you can resume making repayments. There are two types of breathing spaces: a Standard Breathing Space which can last for up to 60 days, and a Mental Health Crisis Breathing Space which can be applied for by an Approved Mental Health Professional, and lasts for the duration of your treatment plus 30 days.

Debtors who are unable to repay loans can also enter an Individual Voluntary Arrangement (IVA) or become Bankrupt.

If you would like to discuss any issues raised in this article, please contact Chris Parkman on 01326 340 579 or email: help@purnells.co.uk.