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How a guarantee works
A guarantee is a secondary obligation: the guarantor promises to perform the borrower's obligations if the borrower fails to do so. Until the primary borrower defaults, the lender's claim lies against the borrower; on default, the lender can call on the guarantee and demand payment from the guarantor directly.
Most business lending guarantees are 'on demand', meaning the lender does not need to exhaust remedies against the borrower or the company's assets before calling on the guarantor. The guarantee document itself will specify whether this is the case.
Director guarantees: common scenarios and risks
Lenders commonly ask directors and majority shareholders of SMEs to provide personal guarantees, particularly where the company has limited trading history or asset base. This aligns the director's personal interests with the company's ability to repay and provides an additional recovery route.
- A limited guarantee caps the guarantor's liability at a stated maximum sum.
- An all-monies guarantee covers every present and future amount owed by the company to the lender — potentially much larger than the initial facility.
- Joint and several guarantees make each guarantor individually liable for the full amount, not just a proportionate share.
- On sale of shares or resignation as a director, check whether the guarantee releases automatically or requires the lender's consent.
Seeking independent legal advice
Before signing a guarantee, especially a personal one, take independent legal advice. Lenders may require evidence that this advice has been obtained — both to protect themselves from later challenge and to ensure the guarantor fully understands the commitment. Guarantees can be set aside by courts in limited circumstances, including undue influence or misrepresentation, but these are high thresholds to meet.
Confirm the exact scope and duration of any guarantee with your solicitor before execution.
Frequently asked questions
Can a guarantee be released during the life of a loan?
Only with the lender's written consent. Lenders are generally reluctant to release guarantees mid-term; however, it may be negotiated at refinancing or on a change of ownership if the new structure provides equivalent comfort.
What is the difference between a guarantee and an indemnity?
A guarantee is a secondary obligation contingent on the primary borrower's default. An indemnity is a primary obligation — the indemnifier is independently liable regardless of whether the underlying debt is enforceable. Indemnities are broader in scope and harder to escape.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.