Own a business? Need finance? Taking out a lease? You may need to sign a personal guarantee. But what is a personal guarantee?
A personal guarantee is a written agreement where you personally guarantee to the creditor that you will pay the debt or liability of the business should the business fail to do so itself. Be aware though, that if the business does not pay its debts, the creditor has the right to go after your personal assets.
Often in smaller businesses, if the business owner is not prepared to financially stand behind the business, a creditor may not want to take a financial risk transacting with the business. Generally speaking, if your primary bank requires a personal guarantee from you for a loan, a lessor or other financier will also require one.
Generally the business owner/s, and sometimes their spouses, are required to provide personal guarantees to creditors as an “added assurance”. This is to ensure the business honours its financial obligations. Normally you will be required to personally guarantee payment of the lease or loan debt, all default interest, as well as legal and other fees.
A notable point is that the creditor is not normally obliged to seek repayment from the business first – it can lay claim to the guarantor’s personal assets immediately, before seeking recourse from the business. You need to ensure you do not sign a personal guarantee if you do not have a sound understanding of the business’s finances and its ability to repay its debt, as only the creditor can cancel the guarantee once it is signed. It is important that if you sell the business, you obtain a signed Deed of Release of Guarantee”, otherwise you may be held liable in the future for the liabilities of the business.
If you are asked to sign a personal guarantee and are unsure about it, we are happy to review it for you.