A personal guarantee is a pretty serious commitment, but it’s not one to shy away from.
They are a fact of life, and any business owner or director looking to invest will likely need to sign a personal guarantee at one point or another.
It’s natural to be concerned about signing a document that puts your home and assets at risk. In this blog, we’ll talk about the 8 most common concerns people just like you have when signing a personal guarantee, and what you can do to protect your assets in the case of business troubles or insolvency.
- Personal financial liability
When you sign a personal guarantee, you, personally, become responsible for any debt that your business cannot repay.
It might be you alone, or is often a group of directors who all signed onto the personal guarantee together.
If your business defaults on any loans, you could be held responsible for repaying the entire debt, including interest, fees and any associated costs.
- Personal risk
If you do not have the liquid capital to repay your debts, or selling your business’ assets does not cover the costs, then your assets may be repossessed in order to recoup funds.
This might include:
- Your home
- Your savings
- Your investments
- Other valuable possessions
Now, the first two points might have you thinking: ‘why would I ever take out a personal guarantee?’.
Yes, it is a risk, but without the loaned capital, you may struggle to grow your business. In order to invest in confidence, we highly recommend taking out personal guarantee insurance, which effectively mitigates 80% of your risk, providing you peace of mind and allowing you to focus on growing your business the right way.
- Unsure of future business success
When you’re signing a personal guarantee for a business loan, you may be concerned about the future of your business, and whether it will be successful.
If you decide to take out a personal guarantee, we highly recommend ensuring you’ve got a long-term plan in place with steps that outline exactly how you’re going to keep the business moving for the next 5-10 years.
This will allow you to sign on the dotted line safe in the knowledge that you know what needs to be done with the money you’re borrowing.
- Relationship strain
Personal guarantees can have an impact on both personal and business relationships.
We recommend opening a dialogue with your family before committing to a personal guarantee. It’s important that they understand the risks involved, but also the benefits of you taking out the guarantee, and why you need it to grow your business.
- Credit impact
Many people who take out personal guarantees worry about the impact on their credit should they fail to repay any loans.
If you do fail to pay, and a lender takes legal action against you, it could negatively impact your credit score and make it harder for you to take out a loan in the future.
- Lack of control
Sometimes, a business’ success is (partially) out of your hands.
You might be worried about your team, or other directors. A personal guarantee is a big commitment. Ensure your team is in the right position to nail your targets before you invest.
Plan training, upskill everyone and be ready to make the most of an injection of funds before you sign on the dotted line.
- Legal obligations
Personal guarantees are legal obligations, and it can be a little intimidating if you don’t fully understand the legal implications, terms and conditions of your guarantee.
We recommend seeking legal advice; legal counsel can advise you on the ins and outs of your specific guarantee, and can suggest whether it’s a good deal, or if you’re best off seeking funding elsewhere.
This is, again, all about peace of mind. You’re going to struggle to perform at your best if you’re constantly worrying about your personal guarantee and the terms that surround it.
- Can you exit the guarantee?
Some people worry about how they’ll exit a personal guarantee once they’ve signed it.
It’s often not easy to remove yourself from a personal guarantee, even if circumstances change. You should bear this in mind when considering signing, and be 100% sure you’re ready to commit to a personal guarantee for a long time.
Is it worth taking out a personal guarantee?
The short answer is usually yes. It’s almost impossible to take out a loan, or source critical business funding, without a personal guarantee.
Lenders need to cover their investments, and without a personal guarantee, the risk is simply too high.
However, we don’t recommend leaving your assets exposed; we highly recommend personal guarantee insurance (PGI), and fortunately, you’re in the perfect place to get it!
Purbeck are the leading UK specialists in PGI. We work with directors and business owners across the country, protecting up to 80% of the value of your assets.
This means that, should the worst happen, and you fail to repay your debts, we’ve got you covered. Hopefully you’ll never need your PGI, but it’s there as and when you need it.
It’s time to invest in your business with confidence. Sign the personal guarantee, insure your assets, grow your business. It’s a no-brainer!
Click here to get in touch with our friendly PGI experts. We’re on hand to answer any questions you may have.
