What is a Personal Guarantee?
A personal guarantee is a legal commitment made by an individual—typically a business owner or director—to personally repay a company’s debt if the company is unable to do so.
In the context of a company mortgage, this means the individual personally guarantees the repayment of the mortgage loan obtained by the business.
Why Do Lenders Require Personal Guarantees?
Lenders often request personal guarantees for company mortgages to reduce their risk, especially in cases involving:
- Small or new businesses with limited credit history or assets
- Higher-risk borrowers
- Insufficient company collateral
The personal guarantee acts as an additional layer of security for the lender.
Key Points About Personal Guarantees on Company Mortgages
Scope of Guarantee:
- May cover the entire loan or be tied to specific obligations
- Can be:
- Unlimited – covering all present and future debts
- Limited – capped at a specific amount or timeframe
Legal Implications:
- The guarantor is personally liable if the company defaults
- Liability extends to personal assets such as:
- Property
- Savings
- Other personal holdings
Types of Guarantees:
- Unconditional Guarantee: Immediate liability upon company default
- Limited Guarantee: Liability is restricted by amount, term, or condition
Risks for the Guarantor
- Exposure of personal assets
- Potential negative impact on personal credit rating
- May affect future personal financial planning and borrowing ability
Negotiating Guarantee Terms
Guarantors should:
- Carefully review the agreement
- Seek legal advice before signing
- Negotiate to:
- Limit liability
- Include release clauses or sunset clauses
- Define specific conditions for enforcement
Alternatives to Personal Guarantees
- Offering business assets as collateral
- Exploring insurance options to cover liabilities
- Seeking alternative financing with fewer personal obligations
Important Considerations
- Legal Advice: Always consult a solicitor or legal expert before signing
- Due Diligence: Evaluate the company’s financial health and risk
- Insurance: Consider guarantee insurance for protection
Summary
A personal guarantee on a company mortgage is a serious financial commitment. It helps companies secure funding but exposes the guarantor to personal liability.
Professional legal and financial advice is strongly recommended before entering into such agreements.
Jiten Shah
Director, JMS Accounting