Before giving a guarantee, whether it is for your children or your business, it pays to understand the worst case scenario.
Be sure you are comfortable with the following:
- As a guarantor you are considered a principal debtor in the eyes of the bank.
- The bank can claim payment of any debt owed to the bank by the debtor from you, without first trying to get the money from the debtor. Furthermore, the bank does not have to attempt to extract the money from the debtor or other guarantors before approaching you.
- The guarantee will likely cover all or any indebtedness owed by the debtor to the Bank at any time. The guarantee is often not limited to the present borrowing and can cover any future or current indebtedness owed by the debtor to the bank.
- It is critical to establish whether the guarantee is limited or unlimited. If the guarantee is unlimited it will cover all and every amount owed by the debtor to the bank without any maximum limit whatsoever.
- If possible, it pays to get the bank to set a figure at which the guarantee can be limited to. Be aware that this figure will be plus interest and costs.
- The bank is quite entitled to deduct any debt owed by the debtor to the bank from any bank account that you may personally have with the bank.
- Be sure to factor in any financial or commercial risk. For example, if the bank were to call upon the guarantee, would you be forced into selling your family home or drastically changing your lifestyle?
It pays to be prepared for the worst and to have thought about the resulting consequences. If you are still comfortable with this, then you are in a position to proceed. We recommend you discuss the implications of giving a guarantee with your legal advisor in more detail.