When entering into business agreements, many individuals are asked to sign personal guarantees as a way to secure business loans or credit. While these guarantees can be an essential tool for companies to access funding, they can also expose you to significant personal risk. At Muldoon Britton, we understand the complexities surrounding personal guarantees and are here to guide you through the process to ensure your interests are protected.

 

What is a Personal Guarantee?

A personal guarantee is a legal commitment made by an individual to repay a business’s debt or fulfil its obligations in the event the business is unable to do so. Typically, personal guarantees are requested by lenders, suppliers, or landlords when extending credit or entering into contractual agreements with businesses.

 

In essence, if the company defaults on its obligations, the individual who has signed the personal guarantee becomes personally liable for the debt. This means the creditor can pursue the guarantor’s personal assets—such as savings, property, or investments—to recover the owed amount.

 

Personal guarantees are commonly required from business owners, directors, or partners, especially in small or start-up businesses, where the business may not have an established credit history or sufficient assets to secure a loan.

 

Risks of Providing a Personal Guarantee

While signing a personal guarantee can help a business secure financing or negotiate better terms, it comes with substantial risks. Here are some key risks to be aware of:

 

Personal Financial Exposure

The most obvious risk is the potential loss of personal assets. If the business fails to meet its financial obligations, the creditor can seek repayment from the individual who provided the personal guarantee. This can include claims against your home, savings, or other personal assets, which may leave you financially vulnerable.

 

Unlimited Liability

In many cases, personal guarantees are “unlimited,” meaning you are responsible for the full amount of the debt, plus any additional interest, penalties, or legal costs. This exposure can be particularly damaging if the company’s financial troubles are severe or long-lasting.

 

Impact on Credit Rating

If the business defaults and you are required to make payments under the personal guarantee, your personal credit rating may be negatively impacted. This can affect your ability to secure future loans or credit, both for personal and business-related purposes.

 

Potential for Legal Action

Creditors can initiate legal proceedings to recover the debt, which could result in court judgments or other enforcement actions. This may include garnishment of wages, seizure of assets, or other forms of financial pressure.

 

How to Limit Risk Under a Personal Guarantee

If you are required to sign a personal guarantee, it is essential to take steps to limit your exposure and protect your personal assets. Here are some strategies to consider:

 

Negotiate Limited Personal Guarantees

While some creditors will insist on personal guarantees, it may be possible to negotiate terms that limit the extent of your liability. For example, you may be able to negotiate a guarantee that covers only a portion of the debt or sets a cap on the maximum amount you are liable for.

 

Request Specific Terms or Conditions

When negotiating a personal guarantee, request clear terms that define under what circumstances you would become liable. For instance, it may be possible to limit the guarantee to certain events or financial thresholds.

 

Additionally, you can request that the guarantee expire after a certain period or once certain conditions are met, such as repayment of the loan or a change in the business’s financial standing.

 

Ensure Proper Business Structuring

Ensure that the business is structured in a way that offers some protection against personal liability. For instance, forming a limited company can provide some protection, as it separates the business’s finances from your personal assets.

 

Seek Independent Legal Advice

Before signing any personal guarantee, it is crucial to seek independent legal advice. We can review the terms of the agreement, advise you on potential risks, and suggest ways to mitigate exposure. This can provide you with peace of mind and ensure you are making informed decisions.

 

How Muldoon Britton Can Help 

At Muldoon Britton, we understand the weight of signing a personal guarantee and the potential consequences it can have on your personal and financial future. Our team of experienced legal professionals can offer tailored advice and solutions to help you navigate personal guarantee matters effectively.

 

Whether you are considering providing a personal guarantee, are already facing legal action due to a guarantee, or need help negotiating better terms, we are here to assist you. Our services include:

 

• Reviewing and negotiating personal guarantees to help reduce your personal exposure and secure more favourable terms.
• Defending against enforcement actions related to personal guarantees, including debt recovery and bankruptcy proceedings.
• Providing guidance and support for individuals dealing with disputes or liability issues stemming from personal guarantees.
• Assisting with business financing structures to protect you from unnecessary personal liability while still ensuring the business can secure necessary funding.

 

With Muldoon Britton’s expert guidance, you can have confidence that your rights and interests are protected. Contact us today to discuss your concerns and how we can assist you with personal guarantees and other business-related legal matters.