Defaulting on Business Debt with a Personal Guarantee
A personal guarantee ties your personal finances to your business debts—know the risks before you sign!
Menaye Finance Tips
Know the Commitment: Understand that a personal guarantee ties your personal finances to your business debts.
Prepare for Default Risks: Be aware that if your business can’t repay a loan, the lender can seek repayment from your personal assets, like savings or even your home.
Plan Financially: Ensure your business has a solid financial plan to manage debts and avoid defaults.
Get Legal Advice: Consult a legal advisor before signing a personal guarantee to understand the risks and explore ways to limit them fully.
Introduction to Personal Guarantees
When you sign a personal guarantee, you are linking your personal financial health directly to your business’s financial responsibilities. This guarantee means you accept personal responsibility for your business’s debts if the business itself can’t repay a loan. This is typically required for small and medium-scale businesses or those without a strong credit history.
If the business fails to repay the loan, you may be required to cover the debt using your personal assets, such as savings.
What Happens When You Default on a Guaranteed Loan
Lender’s Actions: If your business fails to make payments, the lender will turn to you to fulfil the debt obligation under the personal guarantee.
Impact on Personal Finances: The lender can legally seek repayment from your personal assets. This might include your bank accounts, investments, other valuable assets or even your home.
Legal Proceedings: The lender may initiate legal action to recover the debt, which could involve suing you for the outstanding balance.
Risks Associated with Personal Guarantees
Financial Strain: You might face significant financial hardship, especially if you need to liquidate personal assets to cover the debt.
Long-Term Consequences: The effects of default can linger, impacting your ability to start new businesses or obtain personal loans for years.
Strategies to Mitigate Risk
Thorough Planning: Ensure your business has a robust financial plan to handle debts.
Legal Consultation: Before signing any guarantee, consult with a legal advisor to fully understand the risks and explore possible limitations of the guarantee.
Insurance Options: Consider obtaining insurance covering loan payments in business failure cases, if available.
