Why Does A Lender Sometimes Require A Guarantee?

If your business requires some form of finance such as a commercial mortgage or a business loan then the lender will have certain requirements that they will want fulfilled should it be prepared to provide the finance. For instance, it is quite likely that one or more forms of security are required such as a mortgage over the property that the business is looking to purchase with an adequate security margin so that should your business default on the mortgage the lender could repossess the property and sell it to liquidate the liability.

Directors/ business owners are sometimes asked to provide a personal guarantee supported by a second charge over their home in addition to a charge being taken over the business premises.
A bank may require a personal guarantee supported by a second charge over the matrimonial home of a director/business owner as additional security for a commercial mortgage or some other forms of business lending.

One of the other forms of security that may be requested by a lender is a personal guarantee from each of the directors/ business owners. The lender may also request that this guarantee is supported by a charge over the director’s/ business owner’s private residence.

So, why may a lender insist on a personal guarantee as mentioned above?

A personal guarantee ties in the director/business owner on a personal basis and bolsters the lender’s security. It provides the lender with extra peace of mind that, should the business default on the commercial mortgage, it can, if necessary, look to the additional security provided by a guarantee that is supported by a charge over the director’s home. For instance, if the business premises had to be sold but the sale proceeds were insufficient to clear the borrowing in full then the lender can request that the guarantor clear the outstanding debt.

The guarantor may be able to achieve this in one or more ways such as by using their personal savings or perhaps to arrange a further advance from the lender who has a mortgage on the matrimonial home. However, if these are not available options open to the guarantor and there are no other ways for the guarantor to raise sufficient funds to liquidate the debt then, potentially, the lender providing the commercial mortgage could ultimately commence proceedings to repossess the director’s matrimonial home which would be sold and the proceeds used towards clearing the outstanding balance on the commercial mortgage.

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