Guarantor's advice

Acting as a guarantor for a loan can help businesses secure lending that otherwise would not be available to the business alone or available on less favourable terms.

The purpose of guaranteeing lending is that, as well as the loan agreement between the lender and the business, the lender enters into a separate contractual agreement that creates a secondary obligation with guarantor to support the primary obligation of the business. Effectively the guarantor “guarantees” the business loan by agreeing to repay the debt if the business doesn’t.

Often, particularly where the business is a limited company, one or more of the company directors will be called upon to act as guarantor. If several directors act as guarantors (or give a single guarantee jointly and severally), it is often incorporated into the guarantee terms that the lender is under no obligation to take action against all the directors. This means that the lender can select which guarantor(s) to pursues for the debt in the event of a breach. Depending on the financial position of each director, some guarantors may be more appealing to a lender than others, to take over the repayments if they have more financial stability and a higher likelihood of meeting the payments. Both the borrowing business and the guarantor should obtain independent legal advice before committing to meeting the repayments and confirmation of independent legal advice is often a requirement of the loan being approved.

A Guarantor's Obligations

A guarantor must fully understand their obligations under the guarantee. In some instances the terms of the guarantee mean that the guarantee can be changed unilaterally by the lender or the loan amount increased, without the guarantor’s approval. This means a guarantor could become personally liable for new terms a larger amount without prior agreement to the specific terms or amount. As the guarantee imposes personal liability, if the borrower can’t keep up the repayments, the guarantor will have to make them instead. If the guarantor is unable to meet the repayments, their personal assets are at risk such as their home could be repossessed.

To be a guarantor you’ll need to be over 21 years old, with a good credit history and financial stability. If you’re a homeowner, this will add credibility to the application. Before a guarantor is approved, the lender will carry out a credit check. If the borrower keeps up their repayments, the guarantor’s credit score won’t be affected. However, if the guarantor has to cover any of the borrower’s repayments, or the loan falls into default leaving the guarantor responsible for all outstanding payments, this will be added to the guarantor’s credit report. If the guarantor fails to repay the money owed, their credit rating will be affected.

Once the guarantor has signed the lending agreement and the funds have been paid out, the guarantor generally can’t get out of the contract as the lender has relied on your assets, credit history, employment status or other influences to approve the lending so they are unlikely to agree to remove you from the agreement. Our Solicitors can review the terms of the guarantee, advise of the effect of the terms and negotiate on the guarantors’ behalf. For example, it may be possible to limit the guarantee to a set amount, time period or percentage of the debt. It may be possible to exclude specific assets, such as the guarantor’s family home from the guarantee. There may be other options available such as for the company to provide its own security instead of a guarantee Guaranteeing a business loan is a considerable commitment and it important to ensure that the correct legal advice is obtained so that an informed decision can be made.

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