Securing finance for your company may involve the offering up of a personal guarantee (PG). It is important for anyone thinking of doing so to carefully consider the implications before agreeing to offer up their personal assets. Here we look at personal guarantees in more detail:
What is a personal guarantee?
A personal guarantee is an agreement between a director (or directors) of a company and a creditor, whereby the director/directors guarantees/guarantee to repay all or part of the balance owing to that creditor, if the company is unable to do so. Providing a guarantee may seem attractive because it opens a credit facility to the company. A PG is simply an added level of security for the lender as the responsibility to repay the credit not only falls upon the company but falls upon the guarantor personally if the company is unable to repay.
What should I consider before I provide a personal guarantee?
Alternative options; and
Level of demand
Before offering up a personal guarantee think ‘have you exhausted all finance options.’ There may be another lender out there who won’t require a PG. If, having exhausted the options a PG is the only way to secure the finance needed, take advice. Make sure that a legal advisor looks over the terms and conditions and where necessary seek personal financial advice. Some terms and conditions will lend themselves heavily to the lender. Consider a limit on the level of liability.
Consider your responsibilities under the PG and what demand will be made on you in the event that the company cannot repay the debt. Also note that a PG provided by multiple directors will not limit your liability. For example, four directors providing a PG for the same debt will not limit your liability to 25% of the balance, unless this is specifically built into the terms. A co-signed PG will usually be provided on a joint and severable basis, therefore if your co-directors have no assets you could find yourself liable for the entire debt.
What happens if my Company goes into insolvency?
One of the definitions of insolvency is an inability to repay debts as they fall due and this goes hand in hand with a PG being called upon. The lendor is likely to do one of two things;
Call upon the PG immediately; or
Await the outcome of the insolvency process and call upon the PG for the shortfall suffered
Where a lendor elects to call upon the PG immediately a director will have a claim in the insolvency for the money they have paid on behalf of the company to that creditor. However, the call made under a PG will in the meantime affect your personal assets and potentially joint assets i.e. your family home. In some instances, it could result in bankruptcy.
Need advice on PGs?
If you are a company director and worried about PGs and the cashflow of your business, seek expert advice. We can provide direct access to a qualified Insolvency Practitioner for advice both for your company and you personally.
Contact us on 0330 159 8080 now for free advice and support in relation to any personal guarantee queries that you may have from one of our team.