What is a Personal Guarantee and why do I need to sign one?

A personal guarantee is a legal agreement in which an individual assumes personal responsibility for repaying a loan or debt if the primary borrower is unable to do so. This type of guarantee is commonly used by banks and other lending institutions when lending money to small businesses.

When taking a legal charge, a personal guarantee is often required to secure a loan or line of credit for a business. The guarantee serves as additional security for the lender, as they have the assurance that the debt will be repaid even if the business is unable to do so.

While a personal guarantee can provide comfort to lenders, it also comes with significant risks for the guarantor. If the business is unable to repay the loan or debt, the responsibility for repayment falls on the guarantor, who must pay the debt from their own personal assets. This can include their home, personal savings, or other investments.

Another risk for the guarantor is that their personal credit score may be negatively affected if the loan goes into default. The default will appear on the guarantor’s credit report, potentially damaging their ability to secure future loans or credit.

In addition, the guarantor may also face legal action from the lender if the debt is not repaid. This can result in wage garnishment, property seizure, or other legal remedies, which can have a significant impact on the guarantor’s financial stability.

Before becoming a guarantor, it is important to fully understand the risks associated with this type of agreement. The guarantor should carefully consider their financial situation and ability to repay the debt before agreeing to a personal guarantee. They are also commonly asked to seek the advice of a solicitor to better understand the potential consequences of becoming a guarantor. Most commonly, the Personal Guarantee deed will require that it is signed in the presence of the solicitor who has given you this advice.

In conclusion, a personal guarantee is a legal agreement that can provide additional security for lenders when lending money to a business. However, it also comes with significant risks for the guarantor, who may be held personally responsible for repaying the debt if the business is unable to do so. Before becoming a guarantor, it is important to fully understand the risks and responsibilities associated with this type of agreement.