Have you ever been asked to act as a personal guarantor on a business loan? Maybe you’ve been asked by a business owner you’re on good terms with, or maybe you’ve considered taking on the role for a limited company you’re a director of. Is it a good idea to accept the request — and what could the consequences be?
What Is a Personal Guarantee?
There are various ways of offering security to a lender for a business loan, but one of these is a personal guarantee by a third party. The guarantor signs a legally binding agreement that says they’ll cover the loan if the business can no longer make the repayments.
In theory, any adult can act of a personal guarantor, but in practice the lender may place restrictions. For instance, there could be a minimum age, and the lender will want to look at the prospective guarantor’s credit rating, in addition to what level of assets they hold.
How Does a Personal Guarantee Work?
While It’s possible to generalise to a certain extent about being a personal guarantor, the terms can vary. This makes it absolutely essential to read the terms carefully before you decide to take on the role.
In most cases, the guarantee is for a specific loan. This means that, if the business then takes out a different loan from the same lender, this will have nothing to do with you. However, that isn’t automatically the case. Make sure that the terms don’t make a reference to “all monies” given by the lender to the borrower at any time, this will mean that you could be liable for a loan you’re not even aware of.
What Are the Possible Consequences of Being a Personal Guarantor?
In the vast majority of cases, acting as a personal guarantor is a formality in order to provide a necessary security, and there’ll be no consequences. However, should the borrower default on their payments, the consequences for you as personal guarantor could be serious.
These could range from having to cover one or more missed payments to being liable for the whole loan, should the lender call it in and the business can’t cover the cost. Since this is a personal arrangement, rather than a business one, you could end up losing your home or savings, even if they’re held jointly with your partner.
Needless to say, this makes it crucial to be absolutely certain about any business you’re acting as a personal guarantor for. Whether it’s a business you’re a director for, or whether you’re doing a favour to someone else, make sure you do all due diligence to ensure the risk of default is as close as possible to impossible.
So should you avoid acting as a personal guarantor for a business loan? Not necessarily. There can be advantages, especially if it’s for a business you’re personally involved in, but only if you take care. Give me a call if you’re considering this move and want to talk it over.