How can a small business owner cut the risk of a personal guarantee?

Most small business owners would prefer not to sign a personal guarantee, but when it makes the difference between securing finance and having the door shut in your face what’s a small business owner to do?

If signing the guarantee is the only route to finance, the first priority for any savvy small business owner is a thorough check on what they’re potentially getting into.  Even a thriving business can go through uncertain times and if things do go wrong, that guarantee could mean loss of personal assets including home, possible bankruptcy, tarnished credit rating and damaged future career, not to mention a severe strain on family relationships.

So how can you mitigate the risks before signing the guarantee and if that guarantee is called in?

1. Educate yourself about the risks, ask whether you can afford to take them and always seek legal and/or personal finance advice

2. Don’t carry all the liability: split it between your fellow directors

3. Seek absolute clarity on where your responsibilities for the guarantee begin and end

4. Try and negotiate a limit to the time of your exposure and a cap to the amount of the guarantee with the lender, but remember interest and costs added to the debt can soon mount up

5. Check whether you’ve already signed a personal guarantee for a loan because they’re cumulative

6. Ask that the lender first enforces its security over the company’s assets before enforcing the guarantee

7. Confirm all points of agreement intention and expectation in writing with the lender. This could be crucial if there comes a point when you’re trying to negotiate out of a personal guarantee.

Personal Guarantee Insurance is one solution ...

A relatively new means of mitigating the risk is to take out insurance.  Currently there is only one insurer offering personal guarantee insurance to small business owners, which can be purchased for an existing guarantee, or as finance is taken out.  Cover provides up to 60 per cent of the debt value in year one, rising through 70 per cent in year two to a maximum of 80 per cent in year three.  Throughout the policy the small business owner also has access to specialist business advisers whose role is to prevent small problems from becoming big ones and provide support for long term business stability and growth.

Whether you take out personal guarantee insurance or not, there is still scope to challenge a call on a guarantee, although this can be difficult.:

1. Check whether material alterations have been made to the guarantee after you’ve signed it

2. If changes have been made and they’re prejudicial to you, as the guarantor, the document may be unenforceable.

3. Check whether all the key facts were disclosed at the time of signing the guarantee. If not, you may still have scope to negotiate out of the guarantee.

4. Do you believe you may have been subject to undue influence in signing the guarantee? If so, your individual circumstances and position in the company will need to be examined.