There are a number of things to consider before signing a personal guarantee; starting with the basics:
What is your frame of mind?
People come from all sorts of angles when they are about to sign a personal guarantee: Some people don’t think twice about it; they have such belief in their business they think there will never be a problem… Some have sleepless nights, scared out of their wits about signing such a document… Those of the first frame are probably taking things too lightly and those of the second need to consider whether they should be borrowing the money at all or at least get a good clear understanding of the risk.
How strong is your negotiating position?
In any other situation we would be looking at alternative quotes and services but strangely, in the banking world, we tend to only go to the bank we know. And that can weaken your position considerably; banks know this.
How desperate are you for the funding?
This will affect your decision making; planning ahead of time will help. We discuss, at length, how to manage your relationship with your bank in our “Essential Tips” guide; available to download from our website homepage: www.personalguarantee.co.uk
What is negotiable?
Depending on the organization....
With respect to a bank: there is limited scope to change the documentation itself, but there is scope to limit the extent of some of the terms.
Invoice finance/ factoring: quite often they will say it is only to ensure your assistance with the collection of debts, ensure that this is clarified; there is also scope to exclude certain elements of their charges.
Asset leasing: they will often offer the hire purchase/ lease on the condition of you singing a personal guarantee, but then present you with an indemnity. We strongly recommend not signing an indemnity – this effectively makes the obligations on you personally the same as if you borrowed the money personally, so there is no gap between you and the company in this regard as there is with a personal guarantee. This make is it more important to shop around for this type of lending.
Trade guarantees: these come in various forms, sometimes being included with a credit application form, sometimes as a separate document. Presented as a separate document need careful attentions as they tend to be more onerous.
Given the breadth and variety that these documents take, they require individual attention to understand how you can best protect your position.
An over-reaching factor: if you rely on a verbal representation by a representative of the firm asking for the guarantor before signing a personal guarantee, this does form part of the contract. Ensure you keep a detailed note of what was said, date and time, location, if by phone, who was present and can they validate: if those representations are not adhered to, they will affect the ability for the personal guarantee to be enforced.