For those who operate their business through a company or a trust, there may be times when you need to provide a personal guarantee.
A personal guarantee is a written commitment or promise from a business owner to make a payment or perform an act or duty that is owed to a third party when the business cannot.
Many lenders require a personal guarantee as a way of assuring that a business owner is committed to repaying a lease or loan. Personal guarantees can also demonstrate to third parties the responsibility of a business owner, and their intention to repay all leases or loans. Personal guarantees often arise when a business seeks finance from a bank or when it enters into a lease for business premises.
The parties involved in personal guarantees are the ‘creditor’, the ‘principal debtor’ and the ‘guarantor’. The creditor is the person who receives the benefit of the guarantee and is usually a bank, finance company, supplier or lender. The principal debtor is the business owner who is borrowing the money or obtaining the benefit of the contract. The party who provides the guarantee is called the guarantor. For a contract of personal guarantee to be enforceable, it must be in writing and signed by all of the above parties.
It is important for business owners to seek legal or financial advice if in doubt before providing or signing a personal guarantee. Owners should also have a thorough understanding of the following:
The limit of the guarantee
Personal guarantees come with specific obligations, such as repaying a loan or complying with a lease. It is essential for owners to review these terms before signing the guarantee. If the principal dealer breaches these terms, compliance with the guarantee will then become the owner’s responsibility.
How the personal guarantee is released
The release date of a personal guarantee may vary depending on the parties involved. Some banks will not release a personal guarantee until the loan has been fully repaid, whereas some landlords will release a personal guarantee when a lease expires. Owners need to be aware of the release date in case they want or need to negotiate for an earlier release.
Who is being provided the personal guarantee
Investigate the person or entity you are providing the personal guarantee on behalf of. Your personal guarantee will only be called upon if the person or entity you have provided it on behalf of defaults in its obligations. You should investigate and make your own assessment as to the likelihood of this occurring before providing your personal guarantee.
For more helpful business advice, contact us at Leenane Templeton on 02 4926 2300