I’ve decided to lend money to a friend… should I require a personal guarantee?

A young businessman decided to lend his friend’s company a substantial amount of money so that he could enter into a new business venture.

His friend signed a loan agreement that provided dates for repayment, but he didn’t take legal advice about the agreement or get any security for the loan.

Just a few months later the friend’s company was in serious financial trouble and was able only to partially repay the debt.

Often people are unaware of the best ways to ensure a loan to a company is repaid. 

We often recommend to Lenders that they obtain a personal guarantee (separate from the borrower company) over the debt.

What is a Personal Guarantee?

A personal guarantee means that a person (“the Guarantor”) provides a guarantee to the Lender that they will repay the debt of the Borrower in the event that the Borrower is unable to repay the debt. 

These are often used when the Borrower is not a person (e.g. is a Company or a Trust).

What should a Personal Guarantee include?

The types of guarantee you will need will depend on your situation.

• Unlimited – allows the Lender to demand the Guarantor pay all monies owing to the Lender. This includes any money lent after the initial loan advance was made;
• Limited – is an agreed amount that the Guarantor is expected to repay;
• Secured – where the Guarantor grants security over a particular asset(s); or
• Unsecured – where no security is provided by the Guarantor.

It is important to ensure that the terms and conditions of the Personal Guarantee are recorded in writing and are signed by all the relevant parties.

Once the Personal Guarantee is signed, it is imperative to keep it in a safe place because it will become very important if the Borrower and/or Guarantor fail to repay the debt.

If you are deciding whether to lend someone money, it is worthwhile to consider whether you should require a Personal Guarantee.

If you would like to know more about Personal Guarantees, or you want to enforce a Personal Guarantee, it is recommended that you seek legal advice.

Claire Tyler