When am I liable for a personal guarantee?

You become liable under a personal guarantee when your business defaults on or becomes unable to repay a business loan.

But are there any other circumstances when you might need to assume responsibility for your business debts? Many small business owners are concerned that they might unexpectedly become responsible for large sums of money to be repaid.

We’ll take a look at the requirements behind a personal guarantee and when you might have to repay your loan.

Understanding personal guarantees

A personal guarantee is a promise by a business owner that they will become responsible for repaying a business loan should the business default on the loan.

These arrangements offer lenders a layer of protection against non-payment. It also tends to give you as a borrower more access to higher loan amounts.

Personal guarantees are particularly common in small business lending, where the business itself may not have the assets or track record to secure a loan independently.

They can also influence the terms of the loan, such as more favourable interest rates or repayment schedules. It reflects a vote of confidence in your reliability and the viability of your business venture.

When do I have to repay the loan?

By taking on a personal guarantee, you agree that you don’t have to repay the loan unless your business defaults on repayment.

You might find yourself obliged to repay the loan under certain circumstances, including:

  • Defaulting – If you fail to make scheduled repayments or breach other terms of the loan agreement, it’s likely that you’ll then become liable to pay the debt.
  • Insolvency – In cases where the primary borrower is a business that becomes insolvent and is unable to pay its debts, you’ll need to step in and meet your obligations under the agreement.
  • Loan conditions – Certain loan agreements might specify situations under which your liability is triggered, beyond simply defaulting or becoming insolvent.

It’s important that you understand fully the terms of your loan agreement and that you ensure the circumstances under which you will have to repay the loan yourself are outlined clearly.

Does the lender have to pursue the borrower before me?

A personal guarantee will only apply in the event that the original borrower, such as a business, defaults on its loan. Even as a guarantor, you won’t be expected to repay the loan personally unless the borrower fails to make repayments.

Typically, lenders have the right to seek repayment from the guarantor without pursuing the borrower first, known as “on-demand” guarantees.

In practice, this means that your lender can pursue you straight away for the full value of the guarantee.

However, the lender will typically take action against the borrower first and will generally will only take action against a guarantor if the borrower fails to pay or there is a deficit in the sums due to the lender from the borrower.

Protecting yourself

If you are considering offering a personal guarantee to a lender on behalf of your business, you should seek independent advice to ensure that you understand the risks and the circumstances under which you can be pursued for the value of the loan.

We can provide practical support and guidance throughout the loan process, helping you understand your right and obligations before entering into an agreement.

Alternatively, if you’re struggling with loan repayment liabilities, please feel free to get in touch with our Banking and Finance team.