Are you thinking of starting up an agency? Or looking to expand? Do you need more space or equipment? These are typical situations in which your bank, landlord or finance company may ask you personally to guarantee the commitments of your agency.

Under a guarantee, you promise to ensure your agency meets its obligations - for example, to repay its loans to the bank and to make the payments yourself if it defaults. In most cases you will be asked for an indemnity too, which means that even if your agency can escape its obligations you will still be liable to pay.

What are the key points you should watch out for when asked to give a guarantee? First of all, avoid giving a personal guarantee if possible, particularly if it is to be secured on your home. Suggest other types of security from within the agency itself – a charge over its assets, for example.

If you are not in a position to provide the necessary security for a loan, all may not be lost. Assuming you have a viable business plan for your agency and a bank is prepared to provide funding, you may be able to approach the DTI for assistance under the Small Firms Loan Guarantee Scheme.

If you do decide to go down the personal guarantee route, be absolutely sure of what you are agreeing to and try to limit your overall liability. Rather than giving a general ‘all monies’ guarantee, identify the specific debts or obligations covered. You should also ask for an upper limit on your liability. As your agency grows its cash-flow needs may also increase, so that what began as a guarantee of a small sum quickly mushrooms.

Another option is to put a specific time limit on the life of the guarantee, or specify a notice period and the circumstances in which you will be released. Provision could also be made for the guarantee to be reduced or released when your agency’s obligations fall below an agreed level. If you sell your agency (or part of it) remember to get your guarantee released as part of the deal.

You may have fellow directors or partners who are also giving guarantees. In this case, it is best for each of you to seek to limit your own guarantee obligations to a specific figure or proportion of the overall debt. If that is not possible and you must all be liable for the whole debt or obligation, draw up a separate agreement between all co-guarantors providing for you to indemnify each other if the bank or lender claims disproportionately against anyone who is an easy target with deep pockets.

Another thing to avoid, if you can under the guarantee, is allowing the bank to consolidate or set-off any liabilities arising on other trading accounts. And you need to check that there are no ‘negative pledges’ in other agreements preventing you from giving the guarantee.

Finally, be very cautious about providing a guarantee for the obligations of a friend’s or associate’s agency or business, particularly if you are not involved in it and have no control over it.

Above all, remember that by giving a guarantee you are effectively promising to pay all the specified liabilities yourself. So think hard before signing on the dotted line, particularly if it means putting your home at stake.