March 2019 sees a couple of fairly major events for me. First of all, I hit sixty, something I’m ill prepared for and to be honest I’m probably looking to come to some sort of a deal to remain at 59. Then just over a week later is the matter of a Brexit Exit. I’m not sure that Theresa May is having a better time here either. Over the last few months she’s learned to dance like me, wear bad suits and look increasingly old, we’ve a lot more in common that I first thought. Meanwhile I have no more knowledge of the full ramifications of the effects of a deal/no deal/no idea deal than I had when the word “Brexit” first appeared on my news feed a few years back.
There are an estimated 4.5 million Personal Guarantees signed by company Directors in the UK alone. Since the recession it’s rare to find a lender that doesn’t ask for a Personal Guarantee if they are extending facilities to a limited company. Most Directors are reluctant to sign Personal Guarantees for the simple reason that if everything were to go wrong the likelihood of losing their home is amongst their greatest fears.
Accompanying the Personal Guarantee is normally a request to seek independent legal advice as to the enforceability of the guarantee and to acknowledge the likely effect on personal assets should the Personal Guarantee be called in.
Isn’t that a comforting phrase? We often use it when we are in the midst of troubling times or perhaps to explain some news that wasn’t quite what we were hoping for. I have heard many students this week use the phrase, it seems to put disappointing exam results in a context that is somehow part of some bigger picture ...
It’s not just students who use this phrase to excuse ‘today’ as if whatever has just happened is an important part of some bigger plan. It’s used if we want to try and comfort someone trying to cope with a problem or to excuse a position we wish we hadn’t got ourselves into.
There’s no let-up in lender demand for personal guarantees as security for small business loans. So faced with this Hobson’s choice and a future that’s predictably uncertain, what are the pros and cons of signing that guarantee?
As a company Director one benefit of your company’s limited liability status is that your personal assets are normally protected from any claim the company creditors may have against the company. This protection does not exist for sole traders or partnerships.
Your personal assets are yours and the company creditors have no claim against you, just the company.
When considering your business finance options as a company Director, you might be asked to provide a personal guarantee as an assurance for a business loan or another source of financing on credit. This puts you into a direct relationship with the lender, who could legitimately pursue you personally if your company becomes insolvent. But is this a risk that you think is worth taking?
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.
