When faced with the prospect of signing a personal guarantee, it’s important that you know all the potential implications should the bank or financial lender look to enforce that guarantee against you, such as in cases of insolvency through liquidation or administration.
Lenders are increasingly asking small businesses for personal guarantees to secure business finance, as per Purbeck’s recent survey. Almost half (47%) of the commercial finance brokers quizzed reported a rise in demand for personal guarantees, as part of a new business finance package, in the past year.
The survey tallies with Purbeck’s internal data, which revealed a 173% year-on-year increase in demand for personal guarantee insurance in October 2019, with a record peak that month in new policies underwritten.
So, if you need to seek external finance in order to sustain or grow your business, there’s every chance that you’ll be asked to sign a personal guarantee by the provider of the funds.
Should I sign a personal guarantee?
Your business might become insolvent via liquidation or administration. If this is the case, signing a personal guarantee means you’re personally responsible. In other words, if your growth plans don’t quite come off and a claim is made under the guarantee, you (and any other guarantors) will be liable to pay the company’s debt, and your personal assets will potentially be on the line.
If your personal assets don’t cover the debt, you may be made bankrupt.
In terms of a personal guarantee when bankrupt, a lender can issue a bankruptcy petition against the personal guarantor if the debt is greater than £750.
A bankruptcy petition will often follow a statutory demand, which gives the personal guarantor 21 days to pay the debt demanded by the lender. If the personal guarantor fails to settle the debt in that time, the court will assume that the guarantor is unable to pay their debts for the purposes of the bankruptcy proceedings.
Which of my personal assets can be sought under bankruptcy proceedings?
If the court makes a bankruptcy order, an appointed Trustee in Bankruptcy will administer the sale of assets to satisfy the financial demands made by the bankrupt’s creditors. You have to cooperate with the official receiver. If you don't, you could be committing a criminal offence.
The bankrupt will have to disclose all the assets and property in which they have a beneficial interest at the date of the bankruptcy order. When a bankruptcy order is made, all the bankrupt’s belongings become the property of the Trustee – this is called being vested.
There are some goods that are protected from sale or exempt such as any equipment that is used to carry out paid work. However, the family home doesn’t fall into this category. In fact, where a lender has obtained a personal guarantee for a business loan or line of credit, the personal guarantee is often predominantly supported by the equity in their private residence.
What about the personal guarantee and my spouse?
Where a lender has obtained a Personal Guarantee for a business loan or line of credit and the Personal Guarantee is predominantly supported by the equity in their private residence, it is likely that any joint owner of the property - such as a spouse - will also be asked to sign a personal guarantee. Ordinarily with the request to sign a Personal Guarantee comes a request to obtain and confirm receipt of Independent Legal Advice. This will ensure that the lender has complied with the need to draw to the attention of the guarantors the onerous responsibilities that will result should they need to call upon the personal guarantees.
A spouse who does not have any legal interest in the family home may still have rights of occupation, known as ‘matrimonial home rights’, which will be assessed during the first year of the administration of the bankruptcy. A Trustee in Bankruptcy can still apply to the court for an order for the sale of the bankrupt’s family home. After a year has passed since the bankrupt’s estate became the technical property of the trustee, the Court will assume that the interest of the bankrupt’s creditors outweighs all other considerations.
The bankrupt has an obligation to cooperate at all times with their Trustee in Bankruptcy and whilst it is unlikely to be a happy relationship it will ensure that all of the Bankrupt’s creditors can no longer pursue them directly.
How bankruptcies work?
- You can’t borrow more than £500 without telling the lender that you’re bankrupt
You can’t be the director of a limited company, and you can’t play a part in running a company without a court’s permission
You can’t buy a house under the ‘right to buy’ scheme
If you’re self-employed, you can’t use a business name which is different to the one you used before bankruptcy, unless you tell everyone you do business with about the bankruptcy
You’ll be barred from holding some jobs and most managerial positions
If you help another vulnerable person manage their property and affairs using a lasting power of attorney, this will be cancelled
You must cooperate with the official receiver. This includes handing over all documents and providing accurate information about your income, debts and assets
How long does bankruptcy stay on your file?
In most cases, bankruptcy restrictions will last until you’re officially discharged, likely to be 12 months after you are made bankrupt.
If the official receiver finds that your bankruptcy happened because you acted irresponsibly or dishonestly, they can extend the length of time that those restrictions apply. This is called a bankruptcy restriction undertaking and can last up to 15 years. This might happen if, for example, you committed fraud, tried to hide assets, or ran up debts through gambling or similar.
How can I reduce my personal risk?
Without the security of a personal guarantee, lenders’ appetite to provide finance would be non-existent, meaning you wouldn’t be able to grow your business and increase your personal wealth.
On that basis, you might deem it a risk worth taking – but it shouldn’t come at the expense of your personal life. Once that personal guarantee has been signed, the risk can sit heavy. The pressure can put intense strain on family relationships, especially if spouses have co-signed the guarantee.
You may be able to get out of a personal guarantee due to it being unenforceable, but this can involve increased costs as you’ll need to seek legal advice in order to make a challenge.
To reduce your personal risk – and take a load off your shoulders – there’s Personal Guarantee Insurance, which mitigates against potential financial loss for the lifetime of the loan (review annually to assess if circumstances have changed).
With this weight off your mind, you can put all your energy into your growth strategy – and ensure you go home with a smile on your face.
Purbeck offers Personal Guarantee Insurance for SME Directors who have business loans or financial agreements. This covers up to 80% of your risk, giving you peace of mind as you plan the future growth of your business.
Please contact one of our specialists today to learn more on 0208 004 7252.