Loans, guarantees and securities

What a guarantee actually is

A guarantee is a separate contract in which you promise to meet someone else's obligation. That distinction matters: your liability is not the company's liability passed through, it is your own, arising from your own signature. Most commercial guarantees are continuing, meaning they cover the borrower's obligations as they change over time rather than a single advance, and unlimited, meaning there is no cap on what you may be called on to pay.

The features people are most often surprised by

Guarantees are short documents that do a great deal of work.

• The lender can usually demand payment from you directly, without first suing the borrower or realising its security.
• The guarantee typically continues after you sell your shares or leave the business, until the lender releases you in writing.
• It usually covers future borrowings and variations, not just the facility in front of you today.
• It often includes an indemnity, which can survive circumstances that would discharge a pure guarantee.
• Where the guarantee is supported by a mortgage over your home, default reaches the home.

Independent legal advice

Lenders frequently require a guarantor - particularly a spouse or a director who is not the primary borrower - to obtain independent legal advice and produce a solicitor's certificate before the guarantee will be accepted. The purpose is to establish that the guarantor understood the commitment and was not pressured into it. That protects the lender, but the meeting is also the guarantor's opportunity to understand the exposure before it is irreversible, and it is worth treating as advice rather than as a form to be signed.

• Bank guarantees →

Security over business assets

Where a lender takes security over business assets rather than land, the interest is registered on the Personal Property Securities Register. Registration is what makes a security interest effective against third parties and determines priority between competing lenders. For a business owner this matters in three situations: when granting security, when buying a business and needing to know what is encumbered, and when selling and needing registrations released.

• Buying and selling a business →

Release, and why it does not happen automatically

Guarantors regularly assume that selling their shares, resigning as a director, or the business being sold ends their guarantee. It does not. Release requires the lender to agree in writing, and lenders have no obligation to give it. Negotiating release should be part of any exit - at the same time as the sale terms, not afterwards, because the leverage disappears once the transaction has completed.

Loans within families and between related businesses

Money moved between family members or related entities is often documented poorly or not at all, which becomes a problem on a relationship breakdown, a death, or an insolvency, when the question of whether it was a loan or a gift has to be answered from memory. A short written agreement, and where property is involved a registered security or caveat, costs little and settles the question in advance.

• Property and conveyancing →

If a demand has already been made

If a lender has made demand under a guarantee, the position is time-sensitive and the documents matter more than the conversation. Bring the guarantee, the facility documents, any security, and all correspondence. There may be defences, there may be room to negotiate, and there may be steps that need to be taken quickly to protect assets - but which of those applies depends on what was signed.

Process

1. 1

   We read the guarantee, the facility and any security documents before advising.

2. 2

   We explain in plain terms what you are committing to, for how long, and what it can reach.

3. 3

   Where the lender requires it, we provide independent advice and the solicitor's certificate.

4. 4

   We identify anything worth negotiating - a cap, a limited term, or a release trigger.

5. 5

   On a sale or exit, we deal with release of guarantees and discharge of security registrations.

6. 6

   Where demand has been made, we advise on the position and the options quickly.

What to prepare

• The guarantee and indemnity document.
• The loan or facility agreement it supports.
• Any mortgage, charge or general security agreement.
• Details of the borrower and your relationship to it.
• Any correspondence from the lender, particularly a demand.
• For a sale or exit, the sale documents and any release already discussed.
• Details of assets that could be exposed, including the family home.

Risks, deadlines and common mistakes

• Signing a continuing, unlimited guarantee believing it is capped at the current facility.
• Assuming leaving the business ends the guarantee. Only a written release does.
• Treating the independent advice certificate as paperwork rather than advice.
• Selling a business without negotiating release at the same time, when leverage still exists.
• Undocumented family or related-entity loans that cannot be proved when it matters.