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Business owners are often requested to provide personal guarantees for business loans, investment loans or to assist family and friends in need. While providing a personal guarantee may lead to more favourable loan terms or interest rates, there are critical aspects you must consider before signing on the dotted line:

Your Obligations as Guarantor

A personal guarantee is a legal commitment where you, as an individual, make a promise to the lender (often the bank) to fulfil the borrower’s loan obligations if they fail to do so.

If you provide a personal guarantee, a lender can look to the guarantor for repayment of the loan which includes the outstanding amount, accrued interest and any legal costs associated with pursuing you or the borrower. It isn’t just the loan amount that needs to be considered, but potentially these additional amounts that could be sought from you.

Guarantees must only be given voluntarily and never under duress. If you have any concerns about your obligations, you can refuse to sign. However, keep in mind that refusal to provide a guarantee may affect the borrower’s ability to obtain the loan and/or require them to obtain different security.

Exposure of Personal Assets

One of the biggest concerns with a personal guarantee is the exposure of your personal assets. If the borrower defaults on the loan, it is not just your assets at the time of signing the personal guarantee (such as your home, car, or cash savings) that are at risk. Any future windfalls — such as lottery winnings, an inheritance, or houses you purchase in the future — could also be pursued. As businesses often deal with fluctuating cash flow due to changing interest rates or supply chain issues, can you weather potential repayment risks if the borrower defaults?

It is also vital to understand this exposure covers the entire life of the guarantee. This long-term financial vulnerability can create stress, particularly if your financial circumstances change.

How Long Does a Guarantee Last?

Guarantees have longevity and remain enforceable until the guarantor is released by the bank. This might not happen until the loan is completely repaid, the underlying asset is sold, or the bank explicitly releases the guarantor from their obligations. Even if your relationship with the borrower deteriorates – whether it’s a business partner, friend, or family member – you remain liable for the agreement until formally released . Personal guarantees can also present challenges in the event of marital breakdowns as separation or divorce do not automatically mean you are released from your obligations as a guarantor.

The Potential “First Port of Call” for Banks

Often times, lenders are not required to first recover (or attempt to recover) the outstanding amount from the borrower if they default.  The lender may choose to pursue the guarantor director. As such, understanding the recovery terms is crucial.

Your Rights as a Guarantor

It’s not all bad news. As a guarantor, you are entitled to be kept informed about the borrower’s loan and repayment progress, and have a right to request that information from the lender at any time. Keeping an eye on the borrower’s financial health and repayments can help protect your financial interests, particularly if you are not involved in or with the borrowing entity or individual.

Practical Precautions

1. Seek Independent Legal Advice: Have the guarantee documents reviewed by an independent lawyer who can explain the risks and ensure you understand your obligations.
2. Limit Your Liability: Explore options or discuss alternatives to limit your financial exposure, such as setting a cap on the guaranteed amount, requesting an expiry date for the guarantee, or providing other forms of security.
3. Monitor Regularly: Stay informed about the borrower’s loan repayments to anticipate potential issues and act immediately if problems arise.

Offering a personal guarantee is undoubtedly a significant financial decision that should not be made lightly. As pharmacists, you already shoulder vast responsibilities in caring for your community’s health; assessing your financial risks with the same thoroughness is a valuable practice.

If you have any questions regarding the provision of a personal guarantee, please contact Vitality Law Australia by email at hello@vitalitylawaustralia.com.