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Should you make a commercial credit application with a personal guarantee?

Posted by Todd Davison on Oct 11, 2019 9:16:33 AM
  • When making a commercial credit application, in order to inject funds into your business, there’s every chance that you’ll be required to provide a personal guarantee. If you’ve never been through the process before you may be unaware of the implications of doing so and therefore unable to make an informed decision.

    By the end of this article, you’ll understand what it means to sign a personal guarantee, why lenders require it and how you can mitigate your risk.

      • What is a personal guarantee?

      • If you’re a bit confused about what a personal guarantee involves, you’re not alone. Purbeck ran a survey of 500 SME’s, which revealed that only 39% are aware that their personal assets would be at risk if they took out a Personal Guarantee loan.

        Unfortunately, it’s more legally binding than that.

        The reality is that if a loan is agreed with the condition of a personal guarantee, a failure to meet repayments leaves you – the person, rather than “it”, the business – liable.

        Default on the guaranteed business loan and the lender can take possession of your home, car and whatever’s in your bank account. If you can call it an asset, it can be stripped.

        While the guarantee is usually capped at a certain amount, you need to bear in mind that the sum owed may be substantially more by the time interest and costs have been added. And remember, there’s no termination date for a guarantee and they’re also cumulative. 

        Credit scores can also be hit, making it difficult for you to rebuild your finances in the future.

      • Why do lenders insist on a personal guarantee?

      • Unsecured borrowing is almost always supported by a personal guarantee, and it’s common for lenders to ask for personal guarantees to act as security against a secured loan too. Personal guarantees give the lender a written promise, made by a director or number of directors, to accept liability for a company’s debt.

        It can be difficult for lenders to evaluate the strength of a business’ credit. Unlike consumer lending, where lenders can use credit scores and other information to decide whether or not to provide funding, there’s limited information to allow them to make an informed decision about the risk of loaning a business the money it’s requesting.

        Often, businesses that require external funding are in their formative stages, and might not have borrowed money before. For a lender to stump up the cash blindly would be far too risky. The security often comes in the form of a personal guarantee, which goes some way to proving that you are committed to paying back the money you borrowed.

      • What else do you need to be aware of?

      • Your spouse or partner will also have to sign the guarantee if they co-own the family home, so it’s vital you seek sound legal advice before making such an important commitment.

        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.

        Therefore, you’ll need to ensure that every person who signs the guarantee understands the implications of doing so, i.e. how it could affect them.

        Make it a priority to find out what signing that guarantee means for you personally, and what other options there are to finance your business. For many, borrowing money is their only way of starting and growing a business. Borrowing money lets you hang onto complete ownership of the business, but it comes with obvious risks.

      • How can you mitigate the risk of a guaranteed business loan?

      • It’s possible to take out insurance to cut the risk of financial loss when making a commercial credit application with a personal guarantee. Currently, there’s only one insurer offering personal guarantee insurance to small business owners: Purbeck.

        Personal guarantee insurance provides business directors with cover if, following insolvency of their business, the lender calls on their personal guarantee.

        Personal guarantee insurance can be tailored to each individual, so you can state the amount you want to insure, and you can 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. Purbeck covers up to 80% of your risk, so you’re personally protected as you plan the future growth of your business.

        Purbeck Insurance is a specialist Personal Guarantee Insurance underwriter, authorised and regulated by the Financial Conduct Authority. We work alongside lenders and brokers to provide a bespoke insurance solution based on the lender’s individual requirements and risk profile. Please contact one of our specialists today to learn more on 0208 004 7250.

Topics: #pgi, #personalguarantee, #personalguaranteeinsurance, #commercial guarantee, #commercial finance, #bankruptcy

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