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KNOWLEDGE HUB

Understanding Personal Guarantees on Business Loans: Triggers and Implications

Businesses often seek financial support through loans to fuel growth, navigate challenges, or seize opportunities. In many cases, lenders may require additional reassurance in the form of a personal guarantee, especially when dealing with small businesses. A personal guarantee adds an extra layer of security for lenders, but it’s essential for business owners to understand what triggers a personal guarantee and the potential implications.

What is a Personal Guarantee?

A personal guarantee is a legally binding commitment made by an individual, often the business owner or director, to personally repay the business loan in the event of default. Essentially, it means that the individual’s personal assets, such as property, savings, or other possessions, can be used to settle the outstanding debt.

Triggers for Personal Guarantees:

Business Default: The most common trigger for a personal guarantee is the default of the business on the loan. If the business fails to meet its repayment obligations, the lender may invoke the personal guarantee, holding the individual personally responsible for the outstanding debt.

Insolvency: In situations where the business becomes insolvent or faces financial distress, lenders may look to the personal guarantee to recover their funds. Insolvency can trigger a personal guarantee even if the business is unable to fulfill its financial obligations.

Breach of Loan Agreement: Lenders often include specific terms and conditions in the loan agreement. A breach of any of these terms, such as failing to provide financial reports or violating covenants, can serve as a trigger for the personal guarantee.

Change in Business Structure: If there is a significant change in the business structure, such as a change in ownership or legal status, the lender may consider the original loan agreement null and void. This change could trigger the personal guarantee.

Implications of a Triggered Personal Guarantee:

Legal Proceedings: In the event of non-payment, the lender may initiate legal proceedings to recover the outstanding debt. This can involve court actions and additional legal expenses for the guarantor.

Personal Assets: Once a personal guarantee is triggered, the lender has the legal right to pursue the personal assets of the guarantor through the above legal action. This may include properties, bank accounts, vehicles, and other valuable possessions.

Impact on Credit Score: The guarantor’s credit score may be adversely affected if legal action is taken against them which can impact the individual’s ability to secure credit in the future.

Stress and Strain on Relationships: Personal guarantees can strain personal relationships, especially if the guarantor’s assets are at risk. This is most often seen when the guarantor’s half of the family home is at risk. Business owners should consider the potential impact on personal relationships and jointly held assets before entering into such agreements.

 

Mitigating the Impact:

Regularly Review Loan Agreement: Stay informed about the terms and conditions of the loan agreement. Regularly review the agreement to ensure compliance and address any potential issues before they escalate.

Explore Alternatives: Consider alternative forms of security or financing that may alleviate the need for a personal guarantee. This could include offering specific business assets as collateral.

Seek Professional Advice: Before signing any personal guarantee, seek advice from financial and legal professionals. They can provide insights into the potential risks and help you make informed decisions.

Understanding the triggers for a personal guarantee is crucial for business owners entering into loan agreements. While personal guarantees provide lenders with added security, business owners must be aware of the potential consequences and take proactive steps to mitigate risks.

If you find yourself with a personal guarantee claim against you then its important to seek advice as soon as possible. Please get in touch with us by filling in the form on our website, emailing info@personalguaranteesuk.com or call

 

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