We often hear from clients that they understand guarantees to just be an unavoidable part of business. While the request for a Director or personal guarantee may be common practice, before readying your pen to sign, it is important we first bust some myths about your obligations when it comes to guarantees.
What are Personal Guarantees?
A personal guarantee is a serious undertaking that is often requested when a business enters an agreement such as a lease, financial loan, or credit contract.
It provides extra protection for the other side (be it the lender, landlord, supplier etc) by making you liable for any debts the business cannot pay.
Myth 1 – The business’ debts are just that, the BUSINESS’ debts.
Incorrect! When you sign a guarantee, you are agreeing to be liable for your business’ debts in the event the business cannot pay. These are binding commitments which mean your business’ debt can fast become a personal liability forcing you to pay for the debts from your own pocket.
Myth 2 – My personal assets are safe from creditors.
Nope! If it were the case that your business could not pay its debts and you had signed a guarantee, your creditors can seek payment from you personally. This might involve time-consuming negotiations, costly Court litigation, bankruptcy, liquidation and/or losing your personal assets.
Myth 3 – I’m not liable now that I’m no longer acting as Director or my business is no longer trading.
Not quite! Guarantees often continue and are unlimited – that is, the obligations can continue even after you stop acting as Director, the agreement is terminated, or the business stops trading.
Myth 4 – You can’t operate your business without offering guarantees.
We’ve seen otherwise! We often advise our clients to avoid entering into guarantees (especially without advice) and they are typically surprised that suppliers or third parties do not push for the guarantee if it is left incomplete and unsigned.
Remember, the team at Brandon & Gullo are here to provide you advice when it comes to entering agreements or personal guarantees.
Here are three alternatives to signing a guarantee that you may like to consider:
- If it is a supplier you have worked with before, write to them highlighting your past conduct including the length of your relationship and trust built through prompt payment and regular orders.
- See if you can negotiate the payment of a bond or upfront payment instead of signing a guarantee as a show of good faith.
- Consider your personal risk management, for example, you may wish to list one person as director/secretary and nominate the other person to hold your personal assets. In this way, even if a guarantee is provided, there is limited risk that the guarantee will apply to the personal assets held by the non-guarantor partner.
Please note we no longer offer Estate Planning and Business Law as part of our legal services. We would be happy to refer you to one of our referral partners.