The risks of signing a personal guarantee

What a personal guarantee is

A personal guarantee is a promise to a lender that you will pay a debt if the borrower doesn’t. It’s most common in business lending: a bank lends to a limited company, and asks the directors to guarantee the loan personally. Landlords, asset finance companies and suppliers ask for them too.

A limited company normally protects its directors from the company’s debts. A personal guarantee removes that protection for the debt it covers.

The main risks

You could be asked to pay the whole debt

Where more than one person signs, the guarantee is usually joint and several. That means the lender can claim the full amount from any one of you. It doesn’t have to split the claim fairly, and it doesn’t have to chase the company or the other guarantors first.

The guarantee may be unlimited

Many lenders use an “all monies” guarantee. It covers everything the borrower owes the lender, not just the loan you’re thinking about: overdrafts, future loans, interest, charges and the lender’s legal costs. If the business borrows more later, your exposure grows without you signing anything new.

It can last a long time

Most guarantees are continuing. They stay in force until the debt is repaid and the lender releases you. Leaving the company, resigning as a director or selling your shares does not usually end your liability.

Your home can be at risk

Some guarantees are backed by a charge over your home, which lets the lender sell it. Even if yours isn’t, a lender that wins a court judgment can apply for a charging order over property you own, or make you bankrupt if you can’t pay.

You give up protections

Guarantees usually contain clauses that stop you relying on defences you’d otherwise have. For example, the lender may be able to change the loan terms, give the borrower more time or release another guarantor without your consent, and you stay liable.

Questions to ask before signing

• What is the maximum I could have to pay? Is there a cap?
• Does it cover just this loan, or all money the borrower owes?
• Is it secured on my home or other property?
• How do I get released, and what happens if I leave the business?
• Who else is guaranteeing the debt, and is the liability joint and several?
• What is the business’s realistic ability to repay?

Can you negotiate the terms?

Often, yes. Lenders don’t always agree, but it’s common to ask for:

• a cap on the amount you guarantee
• a time limit, or release once the loan is reduced to a certain level
• a guarantee of a specific loan only, rather than all monies
• the lender to pursue the company’s assets first

Your solicitor can explain which changes might be worth asking for. Whether to ask, and whether to sign, is always your decision.

Why the lender wants independent legal advice

Lenders want to know the guarantee will stand up if they ever need to rely on it. If a guarantor later says they didn’t understand it, or were pressured into signing, the guarantee could be challenged. A certificate from an independent solicitor confirms you were advised and signed freely. This comes from the House of Lords’ decision in Royal Bank of Scotland v Etridge.

Getting advice

Your solicitor will go through the guarantee with you, explain the worst case in plain English, and sign the certificate your lender needs, often the same day. See ILA for a personal guarantee or a director’s personal guarantee.