A personal guarantee is common in commercial supply/credit agreements. However, they are often misunderstood. Our article breaks down what it is, and how it can affect you.
What actually is a personal guarantee?
Basically, it is a person’s promise to repay credit issued to a business for which they serve as a partner. Providing the guarantee means that if the business is unable to repay a debt, then the individual will repay it. It provides an extra level of security for creditors, who want to ensure they will be paid. Essentially, it is like a bank guarantee, but is from an individual rather than a bank.
For example;
- Company ABC and Company XYZ agree to enter business together.
- ABC brings on Person K as a personal guarantor. In the event that ABC is unable to pay XYZ their contractual obligation, K will cover the debt themselves.
Types of personal guarantees
Before being involved with a personal guarantee, it’s important to understand the different types. We break these down below.
Unlimited personal guarantees
With an unlimited guarantee, the person is agreeing to lend 100% of the loan in question, if the party defaults on their loan. This may be taken from money, or any form of asset – even your house.
Limited personal guarantees
This sets a limit as to what the guarantor is liable for. Multiple guarantors are often required for a limited personal guarantee. This is a safer option than unlimited, as it can’t cripple a person’s household.
What’s the purpose of it?
To ensure funding for a business, a personal guarantee can be used in a credit deal. Creditors always want to see a return on their investment. Having the guarantee ensures that creditors will be paid, meaning more funding for the business due to the security of their investment.
Basically, it makes funding more accessible for the business. Funding means the business has a chance to expand and develop, providing more money for themselves and their creditors.
What’s the process of a personal guarantee?
A person seeking to provide a guarantee for credit must establish their own credit history and profile in the credit application. Furthermore, they must provide the credit information for the business. This ensures the person is sufficiently able to provide the funds if necessary. If the person chooses to use their assets, detailed information on their assets will be required.
Final thoughts
A personal guarantee can be a good way of ensuring that a business obtains creditors, which may be necessary for it to develop. However, understanding what this guarantee entails is fundamental before agreeing to become one. If you have any enquiries on the issue, a business finance lawyer may be able to assist.
