The protection afforded by limited liability – whether in respect of a limited company or a limited liability partnership – is often rendered somewhat irrelevant as, in the current economic climate, it is not uncommon for a business owner to be asked by his/her bank to provide a personal guarantee for loans incurred by his/her business.
A personal guarantee is a pledge, made by someone other than the borrower, that he/she will on demand repay any loan taken out by the business in the event of default. Liability is usually joint and several, meaning that each person who signs a guarantee can be personally liable for repaying the entire amount even if he/she is only a minority owner in the business.
Effectively, when you sign a personal guarantee you become personally liable for the loan and furthermore a bank may insist that the business owner’s spouse relinquishes his/her rights in any jointly owned property held with the business owner in order that the guarantee can be enforced.
Although often presented on a “take it or leave it” basis the terms of the guarantee may in fact be negotiable. The bank may agree to cap the guarantee to a fixed amount or limit it to a percentage of the loan or modify the circumstances in which the guarantee is triggered. It may also be possible to exclude a spouse’s assets if the business owner’s personal assets are sufficient to cover the loan.
Better still, it may be possible to persuade the bank that, in some circumstances, a personal guarantee is inappropriate, particularly in the case of a reasonably mature business with a good credit history that owns sufficient assets to secure the loan without the need for a personal guarantee.
We are often asked to advise clients on the terms of personal guarantees and their implications and would be happy to discuss your requirements with you.