News

It’s often the case of David v Goliath for many small businesses when it comes to dealing with large firms and their supplier payment cycles. 

Is the economic future really as dire as people make out? 

In January 2018, the Financial Conduct Authority ("FCA") opened a consultation on the role of the Financial Ombudsman Service (“FOS”) and whether its services should be extended to incorporate more SMEs and personal guarantors.

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.

So why would you ever give up that protection?  

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.

What is a personal guarantee and do lenders actually call them in?

A personal guarantee is a contract between a creditor, usually a lender, and an individual, normally a director or shareholder of a company.

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