If you are the director of a small company and you need to raise finance, you may be asked to provide a personal guarantee. You may already have provided one. You may even have forgotten you have provided one! But what exactly is a personal guarantee? And what are the implications of granting one to a lender?
A personal guarantee (in the context we are discussing) is basically a legal agreement whereby you agree to settle your company's debts if it cannot do so itself. Personal guarantees therefore reduce the risk a lender takes when it lends money to your company. If there is more than one director in your company, a lender may seek guarantees from all of you.
Personal guarantees may be given with or without "supporting security" (for example, a charge over your family home).
If your company is subsequently unable to repay the lender and comply with whatever terms have been agreed, you may have to sell your personal assets in order to raise the necessary funds to repay the lender yourself. If you are unable to repay the lender in these circumstances, you may yourself be declared bankrupt, which will in turn affect your credit rating and prevent you from being able to act as a company director.
If you are trying to arrange finance for your company (whether that is in the form of an overdraft, bank loan, invoice finance - whatever) and the lender asks for a personal guarantee, consider the following:
- Can your company put up any other assets as security? Personal guarantees should always be seen as a last resort since they negate one of the main benefits of operating a company: limited financial liability.
- Legal advice is crucial; consider also if any personal assets you put up as security are jointly owned by someone else (e.g. a spouse who is not involved with the company).
- Can the guarantee be written so it refers to a specific liability, rather than any current or future liability to the lender?
- Can the extent of personal liability be capped?
- Are there any provisions to terminate the guarantee in certain circumstances - for example if you subsequently leave the company?
- If a guarantee is to be given, consider whether personal guarantee insurance is available and economically viable?
If your company does get into financial difficulties, care needs to be taken not to repay any guaranteed debt in preference to other creditors if this would amount to an "unfair preference" under the Insolvency Act 1986.
Finally, it is important to monitor the status of existing personal guarantees periodically. For example, once any debt has been repaid in full, or if you leave the company, it may be desirable (or even essential) to remove the guarantee.
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