Understanding Personal Guarantees in Business Loans and How to Navigate Insolvency

Company directors often encounter the term “personal guarantee” (alternatively spelled “personal guaranty”) when seeking business loans. Understanding what a personal guarantee is and when such a guarantee is necessary is crucial for any business seeking funding. Furthermore, knowing what steps to take if insolvency strikes can help you weather the storms that sometimes accompany entrepreneurship.

What is a Personal Guarantee?

Owners are often asked to give a personal guarantee to the capital lender as security, making them personally liable for the debt if the business is unable to pay. Such guarantees are designed to protect the lender’s interests and give them greater assurance of recouping their money.

Personal guarantees are binding contracts, and they become legally enforceable from the moment they are in writing. There is no set time period during which a guarantee can be valid—it depends on the specifics set out in the individual contract terms.

Types of Personal Guarantees

1. Unlimited Personal Guarantee: The personal guarantor is responsible for repaying the entire loan amount, regardless of their circumstances.
2. Limited Personal Guarantee: The guarantor’s liability is capped at a certain amount or percentage of the loan. Negotiating these into the agreement is difficult if the business is already in trouble, so it is definitely worth seeking to make this part of the contract ahead of time.
3. Joint and Several Guarantee: Multiple individuals guarantee the loan, and each can be held responsible for the full amount—allowing lenders to pursue any or all personal guarantors.

Why Agree to a Personal Guarantee?

If your company is able to provide security on the loan, you may not need to assume personal liability for the debt. On the other hand, when a business lacks sufficient collateral or has a limited credit history, a personal guarantee is a way to unlock access to otherwise unattainable funding. 

If you find yourself in a position where your business requires capital that cannot be acquired without a personal guarantee, there are several factors to consider before signing on the dotted line, to ensure you don’t put yourself in a sticky situation.

For instance:

1. If you must cover the debt using your own assets and are unable to, your credit rating may suffer, and you may even be forced to file for bankruptcy.
2. Personal guarantees can often be subject to immediate repayment if demanded by the creditor—and this will likely be at the creditor’s sole discretion.
3. Sometimes, personal guarantees include an “indemnity”—an agreement that the debtor will pay for any losses suffered by the creditor. Naturally, providing an indemnity is best avoided wherever possible.
4. The bank can sell personal assets used to secure the guarantee without needing to go to court. This may include—and is not limited to—your home.
5. Careful attention should be given to provisions in the guarantee that may also put you personally on the hook for future debts and accrued interest.

Questions to Consider Before Signing a Personal Guarantee

1. What exactly is considered a default?
2. How would the creditors enforce the guarantee?
3. In the case of default, will they file a lawsuit or send a collection notice?
4. Is there a remedy period, meaning a specified period of time to cure/pay the default balance?
5. Are the circumstances of your personal finances or assets likely to change after signing the guarantee?
6. Is there any provision in the guarantee requiring that the creditor should make personal demands on you only as a last resort? 

Steps to Take if You Can’t Make Your Loan Payments

Insolvency can be a stressful experience, especially when personal assets are at risk. Here are steps to help you navigate this challenging situation:

1. Assess Your Financial Situation: Take a comprehensive look at your business and personal finances. Identify all debts, assets, and liabilities to understand the full scope of your financial condition.
2. Communicate with Your Lender: Early and transparent communication with your lender is critical. Explain your situation and explore possible solutions, such as loan restructuring, payment deferrals or temporary relief. 
3. Sell Non-Essential Assets: Liquidating non-essential assets can generate funds to repay debts. This step also demonstrates to lenders that you are taking proactive measures to address the debt.
4. Consult a Personal Guarantee Resolution Specialist: The rest of the steps on this list can be performed by you as the business owner, but are unlikely to be as effective as if they are undertaken by a firm that specializes in debt restructuring and personal guarantee resolution.
5. Negotiate with Your Lender: Sometimes, creditors are willing to negotiate a settlement for less than the owed amount. Rise Alliance, together with its parent company, Second Wind Consultants, has successfully negotiated settlements for distressed businesses for more than a decade. 
6. Create a Strategy: Navigating the complex financial landscape is best done with the help of an expert who can provide insights and help you understand your options. While financial advisors and CPAs understand the broad strokes of what’s available, Rise Alliance has the experience and the network to tailor a solution for your business that’s exactly what you need.
7. Explore Bankruptcy Alternatives: With the help of a reputable personal guarantee resolution firm, liquidation and bankruptcy can be avoided. This preserves economic value, owners and jobs, and provides wins for all parties.
8. Plan for the Future: Develop a long-term financial plan to rebuild your credit and avoid future financial pitfalls. This plan should include a comprehensive financial strategy that maximizes cash flow and provides a clear picture of current and future expenses, along with recommendations for a realistic savings plan. 

Rise Alliance provides access to an affordable Business Financial planning platform, which gives clients an opportunity to work with professional accountants & financial planners who can help design a road map for achieving financial freedom. Once their balance sheet has been resurrected, we also help our clients secure conventional funding by introducing them to our funding partners.

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A personal guarantee on a business loan is a significant commitment that ties your personal financial health to your business’s success. Understanding a personal guarantee and the steps to take if you face insolvency can help you manage risks effectively. If your business is in distress and your personally-guaranteed assets are in jeopardy, schedule a free consultation with one of our consultants today.