Personal Guarantees

A personal guarantee is an agreement between the borrower (entrepreneur) and the lender, making the borrower personally liable for the company’s debts or obligations. This is usually done by the borrower putting up his own assets as collateral, and accordingly, lenders may claim said assets in case of the borrower’s default. In the case of default, it will be the lender’s discretion as to which assets to go after, based on what assets are easiest to take control of and sell. Once signed, personal guarantees can only be cancelled by the lenders.

Although the purpose of the limited company is to limit the liability, which shareholders are exposed to in the company, quite often directors of small companies (frequently shareholders themselves) are required to personally guarantee the company’s debts to those lending to the company.

The liability does not have to be shared by a single managing director and may be distributed among all directors, thus reducing the personal risk each director is exposed to. Normally, the liability would be spread between the directors according to their relative share in the company, so that equal shareholders, for example, would split a personally guaranteed liability 50:50.

While giving a personal guarantee exposes borrowers to personal losses, it sends a very strong signal to lenders, as to the commitment of the managing directors in the company’s future and success. Consequently, the personal guarantee lowers the implied risk of the loan, thus making the cost of debt capital lower. This in turn makes the repayment of future debt easier, given lower financing costs.

Procedure:

    • 1. Obtain the document from your adviser/introducer or by request from apply@rebuildingsociety.com
    • 2. The name and details of the guarantor need to be completed on the front sheet and on the first page.
    • 3. The guarantor needs to sign next to their name, in the presence of a witness, who should insert their name and details in the space provided. The guarantor should be given instructions to ensure that the witness is an independent person of sound mind and of at least 18 years of age.
    • 4. The document should be dated.
    • 5. The whole of the document (not just signature pages) should be scanned and emailed to us, and the original should be sent in the post.
    • The best practice is to take the guarantee to a solicitor for advice, and to get the solicitor to certify to the Security Trustee that they have advised you / the guarantor about the risk of signing the guarantee etc. This is what the banks do.

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