A personal guarantee is a legally binding agreement between the Borrower and the Lender to say that the Directors/Shareholders will be liable for paying the debt of the Limited company if it is unable to do so. This Guarantee normally does not come with any supporting security, however, depending on the case, the Lender may ask for supporting security. This may come in the form of a charge over the Guarantor’s main residence or other assets.
A Personal Guarantee can be provided by one or more individuals. Normally a Personal Guarantee will be provided by all Directors of the Limited Company. Lenders may also ask Shareholders to give a personal guarantee as well as the Directors.
If the Limited Company is unable to satisfy the debt that they owe to the Lender, then the Lender will call upon the Personal Guarantees. This would result in the Guarantor having to liquidate assets in order to cover the debt remaining to the Lender. This could mean having to sell their family home.
If the Guarantor cannot satisfy the debt that is remaining, then they may be declared bankrupt, which will have an effect on attempts to raise borrowing in the future. It may also have an effect on the credit rating of the Guarantor and also their ability to run Limited companies in the future.
When signing a Personal Guarantee, the Solicitor acting for the Guarantor should advise them of the ramifications of signing the documents, as well as other risks associated to it.
Can the Personal Guarantee be limited?
It is not unusual for a Lender to set a limit on the personal guarantee that they request from the Guarantor. Some Lenders will set the Personal Guarantee at around 20 to 30% of the total amount borrowed, others may set this around 50% to 75% of the total amount borrowed. It really is up to the Lender what they would like to request.
However, many Lenders will also ask for the Personal Guarantee to cover 100% of the amount borrowed.
It is important to remember that a Broker or the Lender themselves can negotiate on the amount requested under the Personal Guarantee. If the Lender has requested that the Personal Guarantee cover 100% of the total amount borrowed, then your Broker may be able to negotiate this down. This is often easier if the Guarantor is experienced in property and the deal is strong.
It is also worth keeping in mind that the Personal Guarantee is Joint and Several, which means that all Guarantors will be responsible for the full amount of the Personal Guarantee. It is not split amongst multiple guarantors depending on the shareholding they hold for example.
It is imperative to speak to your Broker, Lender and Solicitor to make sure that you fully understand the limit of the Personal Guarantee, and how much you will be liable for if the Limited Company is unable to satisfy the debt.
What information is needed?
Lenders will often request that all Guarantors submit an Asset and Liabilities form, so that they can be comfortable that the Guarantors have sufficient means to satisfy the debt of the Limited Company should the need arise.
They will also ask that all Guarantors also take Independent Legal Advice with regards to the Personal Guarantee. This advice will need to be given by a Solicitor other than the one acting for the Guarantor.
Why do lenders ask for Personal Guarantees?
Lenders ask for Personal Guarantees as it reduces the risk on the loan.
Whilst they have a First Charge over the property and a Debenture over the Limited Company, these do not always provide sufficient coverage should the Limited company default on the debt. By having a Personal Guarantee in place, it means that the Lender has another avenue to pursue in order to get their money back. It is all about reducing risk by taking as much security as possible.
By taking a Personal Guarantee, the Lenders also make sure that the Guarantor is bought into the project. They like to see Investors and Developers putting some skin into the game. This also makes it harder for the Guarantor to walk away from the project if things start to go wrong. It reduces the risk that the Guarantor will bury their head in the sand.