As a business owner, you’ve got to be comfortable with an element of risk. Not only are you risking your own money, but if you take out credit, you’re risking somebody else’s too.
It’s enough to put some people off going into business altogether. However, if you truly believe in what you’re doing, the risk of failure shouldn’t stop you from pursuing your ambition – but you should take mitigating action to protect your personal assets.
If my limited company goes bust, will I lose my house?
If things don’t quite go to plan and your company faces going bust, those lenders who have helped to finance your growth plans will want you to settle any outstanding debts. But what happens if there are more liabilities than assets on your balance sheet?
If a debt that has been secured by a personal guarantee can’t be repaid in full, the creditor will then pursue the director(s) who signed the guarantee personally for the remainder of the debt. In other words, you (and any other guarantors) will be liable to pay the company’s debt and your personal assets will potentially be on the line - including your house.
The good news is there are ways to protect your personal assets as you look to realise the growth potential of your business:
- 1. Register as a limited company
Every business needs a legal structure. You can choose to be either a sole trader, partnership, or limited company.
A sole trader is essentially a self-employed person who’s the sole owner of their business. It’s the most straightforward of the three options – but sole traders have unlimited liability, which means there’s no legal difference between themselves and their business. So, if the business gets into debt, the business owner is personally liable.
Unlike sole traders, a limited company is legally separate from its business owner, who has limited liability. This means personal assets aren’t exposed – you only stand to lose what you put into the company or if you sign a personal guarantee.
- 2. Prioritise organic growth
Organic business growth is when a business drives growth through internal improvements or optimisations, using its own resources. Optimising internal processes, developing new and improved products, cutting waste and reallocating resources can all be examples of organic growth strategies.
When a business pursues an organic growth strategy, they lower their risk, as they remain in familiar markets, where costs, trends and audiences are well understood.
The alternative is rapid growth, which by its nature requires the business to take on a lot of debt to make the strategy work. Fast growth increases the rate at which cash leaves your business – if growth spirals out of control, it can put your business' financial solvency at risk.
- 3. Take out the relevant insurance
For most businesses, they reach a point whereby they need to seek external finance in order to progress – if they don’t, they risk stagnating or going backwards.
There are many sources of finance available to business directors – but the common theme amongst many of them is that the lender will often ask for a personal guarantee as collateral security in return for the funds.
If you’re required to sign a personal guarantee as part of a loan agreement, you can mitigate your personal risk with Personal Guarantee Insurance (PGI).
With Personal Guarantee Insurance from Purbeck, you can cover up to 80% of your risk, so you’re personally protected as you plan the future funding and growth of your business.
PGI can be tailored to each individual, so you can state the amount you want to insure and choose how many directors you’d like to be noted on the Policy. Purchasing this insurance policy will help to reduce the risk to your personal estate, leaving you to get on with running your business and securing your financial peace of mind.
For more information on what personal guarantee insurance entails, speak to one of Purbeck’s specialists today on 0208 004 7250.