When entering into a personal guarantee, an individual is potentially risking their own personal assets if the guarantee ever requires to be enforced. With this in mind, it is vital that a guarantor understands exactly what they are entering into and the implications it may have for them.
On 12 September 2024, the Lending Standards Board (LSB) announced some key changes to personal guarantees provided for SMEs which should help ensure that lenders are clear with guarantors about what they are signing up to. The changes, which are incorporated in the LSB's updated Standards of Lending Practice for business customers, should ensure that lenders maintain up-to-date records and provide the appropriate level of information to guarantors.
The key changes, which apply to LSB-registered firms, are as follows:
1. Annual reminders
From 8 September 2025 lenders will be required to provide guarantors with an annual reminder that a personal guarantee remains in place. This will be helpful for both lenders and guarantors in terms of keeping their records up to date and noting the current outstanding liability.
In a previous blog I discussed that when debt has been repaid or discharged, the guarantor is entitled to ask the lender to release them from the guarantee. As well as assisting guarantors in keeping up to date with their outstanding liabilities, this new requirement will serve as a reminder to guarantors whose circumstances have changed (e.g. where they are no longer associated with the business which they provided the guarantee for) to ask the lender to release them from the guarantee so that they are no longer liable.
2. Independent legal advice
As I also noted in my earlier blog, before entering into a personal guarantee, lenders will usually require each guarantor to obtain independent legal advice to ensure that the guarantor has a clear understanding of the nature, consequence and extent of liability and risks associated with the personal guarantee.
From 12 September 2024, LSB have updated their lender requirements in this regard, reinforcing the need for lenders to advise potential guarantors to seek their own independent legal advice prior to signing.
3. Enhanced guidance on providing information
Since entry into a personal guarantee can potentially risk all of a guarantor's personal assets, including their home, the LSB have sought to further protect guarantors through the introduction of enhanced guidance for lenders on providing information to a guarantor about how the personal guarantee will function and the guarantor's obligations under it.
Personal guarantees play an important role in supporting access to finance. The key changes will be beneficial to both the guarantor and lender, acting as a house-keeping reminder for each party, and ensuring that the guarantor better understands the implications of entering into a personal guarantee.
If you have any queries about personal guarantees please contact Eilidh Calvert or your usual Brodies contact.
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