Business Law - Reviewing Personal Guarantees

If you have signed a personal guarantee, now is probably the best time to have a look over it and to work out what powers your bank has and what your liabilities are. The majority of new businesses will need help from the bank to get a start up loan. Many are in a weak bargaining position as they are yet unaware of how successful their business will be. Those starting a limited company will usually have to provide the bank with a personal guarantee before the bank will lend to them. It is very important that you are fully aware of what this means to you and your business.

A personal guarantee is a type of promise that you make to your lender which makes the person who signs it personally liable for the debt that is being borrowed. There are two types of guarantee, limited and unlimited, a limited guarantee will set a maximum limit for the amount the guarantor is liable for, an unlimited guarantee will have no limit. A limited guarantee will also be liable for interest and costs so although it might be presented as limited, this is not actually the case.

The personal guarantee will still stand even if the original loan is paid off, which means if you need to borrow anything else from the bank, you will still be bound by the same guarantee.

A guarantee will also be cumulative, this means that if you sign a guarantee for £15,000 and the bank requests that you increase it to £20,000, you will stand to be liable for £35,000 unless the bank has ended the previous guarantee.

Any savings that you have will be liable to be seized at any time in order to pay off the debts that have been raised by your business.

There are only two ways in which you can release yourself from a guarantee, the first is to ask your bank but it is very unlikely that they will agree to do it. The second option is to go over the small print in your guarantee and to see if there is a clause which covers how you might be able to terminate it. Standard procedure for the termination of guarantees is to give your bank a period of notice, which can range from three to six months and at the end of this period the amount that you will be liable for, will be capped at the amount that your business owes at that time. For it to be worth terminating the guarantee you should try to make sure your business owes little to nothing when you go ahead.

If you think that you have signed a personal guarantee, you can go to your bank and ask them for copies of the personal guarantees that you have signed. You should then look over them and see what it is they are relying on for security in your business.

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