The latest data shows that three in four of all small and medium size businesses in the UK are carrying some form of corporate debt, with an average borrowing of £200,000.
To secure their borrowing, more than half (54%) of UK SME business owners have given personal guarantees. But in doing so, they have made themselves personally responsible for any debt that is owed to the lender that can’t be repaid by the business.
But what does that actually mean in practice? Here we look at all the things you need to consider before you go ahead and sign a director’s guarantee:
- Your personal assets may be at risk
In a Purbeck survey of 500 SMEs, only 39% were aware that their personal assets would be at risk if they took out a personal guarantee backed loan.
If you default on one of these loans, the court is likely to agree that the lender has a legal right to your home, car and whatever’s in your bank account. If you can call it an asset, it can be taken away from you to settle the debt.
As a result of a director’s guarantee being called in, your credit score could suffer, making it difficult for you to rebuild your finances in the future.
- Your partner might also have to sign the agreement
- If you share the ownership of your house with your spouse or partner, they will also have to sign the guarantee to show that they understand that the joint asset could be stripped if the loan defaults.
It’s crucial that every person who signs the guarantee understands the implications of doing so. Most guarantee forms require joint and several liability. This means that each individual who signs a guarantee can be liable for the whole amount of the loan.
- You could incur additional costs
As with anything involving debt recovery, if a director’s guarantee is called in, you can expect additional costs to be placed on top of any debt owed.
These extra expenses might be court costs, debt recovery agent fees or some other miscellaneous legal costs. These can be a hard pill to swallow for debtors who, having been unable to find the money to pay the outstanding debt, must now find even more money.
- You can still be liable even if you’ve left the business
If a director’s guarantee is called in once you’ve left the business, you (and any other guarantors) will still be personally liable for the debt. Resigning from a post doesn’t make a personal guarantee go away.
So, if you’ve signed a personal guarantee, you might want to take a long, hard think about whether resignation is the right option. Giving up your role as a director means you will no longer be able to influence how the company is run, and your access to accounting/ financial information will be removed. You’re essentially left in the dark – while still being liable for the debt.
You can ask to be released from the personal guarantee upon your departure as director. However, the lender is likely to ask for someone else to act as a guarantor. It will also depend on whether the company has managed to keep up with repayments to date.
- Insolvency doesn’t provide protection
In the case of a company becoming insolvent, if a debt that’s been secured by a personal guarantee is not repaid in full, the creditor can then pursue the director(s) who signed the guarantee personally for the remainder of the debt.
To understand more about the insolvency process, and to fully understand what it means if you’ve signed a director’s guarantee, read this guide.
- You can cover up to 80% of your risk
It’s easy to get covered for new or existing director’s guarantees. With Personal Guarantee Insurance, you can cover up 80% of your risk.
Here at Purbeck, for secured loans, the fixed percentage is 80% from year one, with a maximum cover limit of £400,000. For unsecured loans, the fixed percentage rises incrementally – year one 60%, year two 70% and year three 80% – with a maximum cover limit of £300,000.
Having this kind of protection provides you with peace of mind so that you can focus on growing your business without the stress of your personal guarantee looming over you.
If your director’s guarantee is called in, Purbeck’s experienced team of business advisers will be right by your side. Get in touch with our team today - we’re on hand to answer any questions you might have about Personal Guarantee Insurance.