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Why do Banks insist on Personal Guarantees?

Banks often insist on personal guarantees as a way to mitigate the risk associated with lending money to small businesses. Personal guarantees provide the bank with an additional form of security in case the primary repayment source—such as business assets or collateral—proves insufficient to cover the debt.

Here are a few reasons why banks insist on personal guarantees:

1. Risk Mitigation: Banks use personal guarantees to reduce their risk when lending to businesses. By having a personal guarantee, the bank can hold the individual personally liable for the debt if the primary borrower defaults.

2. Demonstrated Commitment: Personal guarantees can also be seen as a demonstration of the borrower’s commitment to repaying the loan. When individuals are willing to put their personal assets on the line, it can signal to the bank that they are serious about meeting their obligations.

3. Alignment of Interests: Personal guarantees align the interests of the borrower and the lender. When borrowers have a personal stake in the loan, they have a greater incentive to ensure the success of the business or the repayment of the debt.

4. Prevents the Bank being exposed to the protection that limited liability offers companies: If personal guarantees weren’t around it would be highly unlikely that small businesses would be able to obtain finance.

5. Confidence in Borrower’s Integrity: Providing a personal guarantee can also demonstrate the borrower’s integrity and willingness to stand behind their financial commitments, which can help build trust with the lender.

It’s important to note that personal guarantees can carry significant risks for the individuals providing them, as they can be held personally liable for the debt if the borrower defaults. As such, individuals should carefully consider the implications of providing a personal guarantee before doing so.

If you signed a personal guarantee or are facing a claim we are able to help. For a free initial consultant then please get in touch on 0333 8801791 / email us or fill in the contact form on our website and we will be in touch.

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