Personal guarantees explained

A personal guarantee is an agreement where you are personally responsible to repay the loan in the event the business is unable to do so. It is currently an industry standard to require a personal guarantee as it is required by nearly all unsecured lenders (including the banks). Whatever the amount you apply for, your net worth or situation, the lenders that require a personal guarantee will always require a personal guarantee.

Lenders will only look to exercise a personal guarantee if the business is unable to pay its own debts through sales, cash in the bank, selling off assets, Director’s loans etc.

I can’t repay my loan, what happens next?

As soon as you think you may struggle to repay your loan, you should contact the lender immediately as they will do what they can to help you as ultimately, they don’t want you to default. Most lenders will look to work with you to help you repay the loan. For example, some lenders even provide free access to consultants who can help your situation. On top of this, the lenders will look to work with you to ease the current situation by reducing your monthly repayments or giving you a holiday period of no repayments until your cash position improves/ you pick up a new contract etc.

If you’re still unable to repay the loan, then some lenders will simply work with you to figure out what you can repay personally and if agreed, you then pay back a reduced amount, however this will still show as a default on your personal credit profile.

Lenders in the alternate market aren’t bullish and won’t just send debt collection agencies to you. Some don’t work with debt collection agencies at all, and ultimately, they’d all rather work with you to help you repay the loan as they want to make a return on their investment.

The worst thing you can do is not work with the lender to improve the situation. If you ignore them, then they will have no other choice but to enforce the personal guarantee.

Can I lose my house?

Technically, yes. If you don’t comply with the lenders, then they may take you to court to help recover the debt. It is then up to the court to decide whether the lenders can take a charge on your property. If granted, then you will be restricted with what you can do with your property and when sold, will have to repay the charge to the lender. We would therefore recommend that as soon as you find yourself struggling to repay your loan, that you contact the lender so that they can help as it’s in their best interests to help you repay the loan in full.

Third-party guarantor

If you’re not a homeowner or your personal credit isn’t good, then some lenders will accept a third-party guarantor such as a family member, who can also act as a guarantor for the loan to help you get a better offer. By signing a personal guarantee, the third-party guarantor is equally responsible for the loan and will be required to repay the loan if the business or you are not able to do so. However, if you’re confident that you can repay the loan, then a third-party guarantor is a great way to get a better offer.