the money guides
If you borrow money, you may be asked to provide a personal guarantee (PG) to the lender.
On the face of it, a PG costs you nothing. There’s no charge and you don’t have to put money down, although you might have to pay for the legal documentation. That can make it seem like an attractive way to borrow money and capitalise your business.
Imagine you invest £100k into a business and it fails: you lose the £100k. If you don’t have the £100k but you need the cash, someone may be willing to lend you the money. You get the cash you need, you put it into your business and you pay them interest. That’s great. Sometimes things go wrong. Let’s imagine that the business fails. Lenders don’t want to lose money – that’s not how their business works – but you’ve given them your personal guarantee. So, they come after you for the £100k they’ve lent you (and the unpaid interest charges and the legal costs of recovering the debt) and you have to pay this from your personal assets. That means you might have to sell your family home.
You may have business partners and you may be asked to give a “joint and several” guarantee. Many people think that if a guarantee is called, the cost will be shared equally between the guarantors. So, if there are two of you and the unpaid debt is £100k, you may think that the lender will come after each of you for £50k. That’s not how it works. The lender will come after the guarantor who is easiest to pursue. If that’s you, you’ll be on the hook for the full amount. You might not even be the most financially secure of the joint and several guarantors. In theory, you’ll have the right to pursue your fellow guarantors for their share of the costs, but that will involve time, expense and, even if you win your case in court, you can’t be certain of recovering their share of the costs.
Lenders may seem nice when they transfer their money to you, but however happy they are to take your interest payments, if you’ve guaranteed the debt, they will recover the money from you. All the hardships you and your family face because of that will not change their minds.
In summary, be very cautious before you agree to personally guarantee anything and be even more careful if you’re asked to do so jointly with others.Copyright © Chris Lowe, Colobus 2021