Six Weeks to Lose it ...

After building a business over many years it could just take six weeks to lose the lot if you have signed a Personal Guarantee.

In the early years of a fledgling business there will be a number of challenges. Cash flow is usually the most likely to focus your attention and give you sleepless nights. As the business grows in confidence and turnover the lure to borrow funds to accelerate growth begins.

There is an ever increasing necessity for Directors to sign a Personal Guarantee to support business finance ...

Since the last recession most lenders will insist on having a Personal Guarantee from the Directors or Executive Board of a Company. The nature of that Personal Guarantee will give the lender the right to pursue all of the guarantors personally to the point of personal bankruptcy, so it is one of the most potentially dangerous agreements you will be likely to sign. The usual conundrum is that the business needs the funds to grow and without signing a Personal Guarantee most lenders will not advance funds.

Consider the potential ramifications this may have on your personal estate ...

What you need to consider when signing a Personal Guarantee is how convinced are you that the risk is worth the reward. In many cases your personal assets have taken many years to accumulate, at it’s finest point a personal guarantee could see you facing personal bankruptcy in just six short weeks.

What about jointly signed Personal Guarantees?

Most small business owners are not averse to risk and many have skilfully negotiated a number during their business lives. However, where the Director’s personal property is jointly owned the lenders will now insist upon the spouse also obtaining and confirming independent legal advice on signing the Personal Guarantee.

Whilst most solicitors recognise that the Personal Guarantee is likely to be signed, regardless of their advice to the contrary, some of them have introduced the idea of Personal Guarantee Insurance to reduce the exposure to personal assets.

As businesses have grown, many have become more highly geared in terms of borrowing and Directors find themselves nearing retirement age and unable to retire as their commitment to the business is unending. Most lenders will not simply remove a Director from the Personal Guarantee without someone of similar financial statute replacing them. Invoice financing and factoring in particular have open ended agreements to continue funding monthly invoices where the amount of the personal guarantee is crucial to the overall amount of funding available, often forcing the value of the personal guarantee upwards as a result.

The net message of any solicitor looking to offer independent legal advice on signing Personal Guarantees would be simply not to sign anything that will allow your creditors access to the fullest extent of your personal assets. However, as many will also admit, if you need the funds then the very least you should do would be to understand the fullest extent of the potential downside should those Personal Guarantees be ultimately called upon. If that leaves you with the kind of feeling that will make sleep regularly difficult then you probably owe it to yourself to at least see how much it would cost to insure them.

Remember that it can take a lifetime to build up a fund to retire and only six weeks to lose it.