Fair Contracts

Personal guarantees – the trapdoor in many loan agreements

Most businesses – at some point in their existence – require a loan. In most cases, it’s to help the new venture get off the ground in the first place. But it could be to buy a building or for a cash injection as the business seeks to expand.

These loans almost always require a personal guarantee – an agreement between a business owner and a lender which states the individual who signs on behalf of the business is responsible for paying back the loan should the business not be able to.

The problem is, these guarantees are not always understood by the business owner. They’re not called ‘loans’ and the recipient, in their eagerness to get the cash they need, might not even register the liability they have just signed up to.

At Fair Contract Associates, we see many people who have not understood the personal guarantee they have signed and have had a nasty surprise when a demand for payment has dropped onto their doormat.

It’s easy to brush the risk off

The owners of more than half of all small and medium-sized businesses have some form of personal guarantee in their name. They are used on everything from finance agreements to company credit cards.

But directors need to be crystal clear on where they have a personal guarantee and what is included within it.

At the time of signing, it’s very tempting to brush a personal guarantee off as an occupational hazard or something which will never come back to haunt you. Quite often, in the blur of signing on the dotted line and getting their hands on the cash that is going to make their dreams come true, many people forget that they have even given the guarantee in the first place.

But if the worst happens and your company becomes insolvent, you miss a loan repayment or you can’t raise the money to pay your monthly credit card bill, it can turn into a personal nightmare.

Get your contract checked for peace of mind

At the very least, it’s worth getting a solicitor involved before you sign up to a personal guarantee. They will check what’s included in there, precisely what your liability will be, and clarify everything so the details of the personal guarantee are clear in your mind.

Chas Jordan, owner of Fair Contract Associates, said: “Personal guarantees are all too often the forgotten detail of a loan agreement – with what can be devastating consequences.

“Defining what a personal guarantee includes can be complicated and requires careful reading of all the paperwork. Without that level of understanding, people can find themselves losing their assets – or even their homes.

“Getting your agreement and any liabilities checked before signing anything ensures you know what you’re getting yourself into, so there are no nasty surprises around the corner.”

Fair Contract Associates

With 53 years in the industry, we know every trick in the trade and have been working hard to stamp out bad practices when it comes to office supply contracts. We help buyers at whatever stage of their purchase they’re at.

We offer a fully independent low-fee contract checking service – so you know exactly what you’re getting and what you’re paying before you sign anything.

Need help with a contract? Schedule a call today.