Personal Guarantee
Personal Guarantee
Definition of "Personal Guarantee"
Generally, a Personal Guarantee is where a third party guarantees the financial obligations of a person under a contract. Also known as a personal guaranty.
In lending, a Personal Guarantee is a guarantee in which an individual agrees to be responsible for the financial obligations of a debtor or borrower to a lender, in the event that the debtor or borrower fails to pay an amount owing under the loan agreement.
In leasing, a Personal Guarantee is where a third party guarantees the payment of rent by the tenant to the landlord. If the tenant fails to pay the rent, the landlord can go after the guarantor for any amounts owing under the lease.
You may be asked to provide a personal guarantee in numerous circumstances throughout your life. When your child goes to university you may be asked to guarantee his or her rent, or to guarantee mortgage payments.
If you start a business and apply for funding by way of a loan or overdraft, you may be asked to give a personal guarantee in the event that the business fails. You may also be required to give a guarantee if you purchase a franchise.
Implications
You should only provide a guarantee after you have given full and proper consideration to the potential liabilities to which you will be exposing yourself. In particular, unlimited guarantees are to be avoided if at all possible, especially in relation to business.
Purpose of Personal Guarantee
The purpose of a personal guarantee form is to protect the interests of both the buyer and the seller. For the buyer, the text included in the form states the terms of payment, including the assessment of late fees or penalties in the event that a payment is delayed. While this detail may be included elsewhere in a service contract, the presentation in the form helps to ensure that the buyer does understand the conditions for payment, as well as the consequences if payments are not made according to the agreed upon schedule.
Does guarantee needs to be written?
The guarantee is normally in written and signed by the guarantor. But a guarantee can be enforceable even if it is not in writing; the guarantee could be implied from the conduct of the parties such as a partial payment after a promise relied upon by the creditor to provide credit to the debtor.
Financial Lending Guarantees
There are several ways in which lenders seek to obtain guarantees:
from directors of a limited company
from partners in a partnership
from people otherwise involved in the business
from an external guarantor, who may not be willing to invest directly but will risk providing a guarantee
Limited Liability and Personal Guarantees
One of the benefits of setting up your business using a limited liability structure is that in the event of failure of your business, the limited liability element will prevent directors and/or shareholders from being sued by creditors for your personal assets. However, businesses that do not have a track record may not be able to obtain credit of their own volition, hence the need for personal guarantees.
Dangers of Personal Guarantee
Acting as a guarantor for any type of commercial loan or lease agreement can leave a director liable for repayment for a potentially unlimited time period, even if his association with the company for which he provided the guarantee has come to an end.
Their liabilities under the guarantee may continue, even if they have sold the company or a property lease has been assigned, leading to potentially disastrous financial consequences.
Businesses which rely on personal guarantees to back up bank loans should also be aware of the effect of changing economic circumstances on their guarantors.
If a guarantor is no longer in a position to pay back a loan or overdraft, then the lender may choose to demand its cash back from the company immediately.
Advantages of Personal Guarantee
A personal guarantee allows a company to borrow money without additional encumbrances on its business or assets.
If the company keeps up its payments, there is no need for the bank to enforce a personal guarantee.
Most banks and reputable financial institutions will insist that the director and/or shareholder giving the personal guarantee obtain independent legal advice in respect of the implications of giving such a guarantee. This will ensure that the signatory to a personal guarantee understands the terms and consequences of giving the guarantee.
Typical Clauses in a Guarantee Agreement
1) Payment on demand means exactly what it says. If the company is either late in paying or fails to pay at all, you'll be expected to find the cash instantly.
2) Joint and several liability means that if there are more than one of you acting as guarantors, then the creditor can choose whom they come after. It is entirely their decision.
3) All monies clauses are usually found in bank guarantees. As well as having to honour the debts of the company, the bank will ask you to pay up all outstanding personal loans, which may, of course, include your mortgage, any indebtedness on your own personal account, together with bank charges. In essence, everything you owe it!
Minimizing Risk
Although the safest option may be not to sign a guarantee agreement (particularly if there is no benefit to the guarantor from the loan), a potential guarantor can take steps to minimize the risk by (i) asking the borrower to save up a deposit first, so that the lender has alternative security, and (ii) considering what additional information the borrower can provide to the lender, so that the lender can reassess the need for a guarantee.
If a guarantor decides to sign a guarantee agreement, he or she can limit liability by:limiting the sum of money for which the guarantor is liable to a specific amount, to include all lender's interest, costs and other sums, and ensuring that he or she can afford to lose this sum;limiting the guarantee to a specific period within which a claim can be brought by the lender against the guarantor, so that he or she knows when they are free of a potential claim;ensuring that the lender is not permitted to give the borrower any allowances or remissions in time, or reductions in amounts;asking the lender for the right to terminate the guarantee agreement after a certain notice period (which is often four weeks);requiring that any variation to the terms of the loan be first approved by the guarantor; andgetting impartial legal advice.Net Lawman's Personal Guarantee Agreement DocumentThere is no one version of a personal guarantee document that is right for every situation. Fortunately, it is possible to make use of many different templates that can be adapted to your situation.Net Lawman's documents have been drafted by expert team of Solicitors and Barrister which can be used to join one or more guarantors into the contract. http://www.articlesbase.com/law-articles/personal-guarantee-3614401.html
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