Tax & admin · 16 December 2019

The pros and cons of signing a personal guarantee

signing

Signing a Personal Guarantee to secure access to funding can be one of the most daunting aspects of running a small firm. All the risk is on one or possibly a small group of individuals willing to put their homes and life savings on the line for the sake of their business.

Personal Guarantees can apply to a wide range of loan facilities including those available from P2P lending platforms.

But currently, a lot of the demand for Personal Guarantee Insurance is coming from the alternative finance market.

For some, it’s all part of the risks involved in being the owner of a small firm, for others, it’s a step too far. With countless news reports of small businesses under severe financial pressure due to the uncertainty caused by Brexit, it’s worth looking at the pros and cons of signing a Personal Guarantee.

What is a Personal Guarantee?

Personal guarantees give the lender a written promise, made by a director or number of directors, to accept liability for a company’s debt.

In practice, this means that if the business defaults on a loan the director’s home, car and anything in their personal bank account could be called on to settle the outstanding debt.

If you co-own your home, with a spouse or partner they will also have to sign the guarantee.

This underlines the importance of seeking sound legal advice before making such an important commitment.

Most guarantee forms require joint and several liability. This means that each individual who signs a guarantee can be liable for the whole amount of the loan.

The Pros:

? Right now, funding options for small businesses are not in short supply and the SME Finance Charter has put pressure on lenders to maintain access to funding, but a Personal Guarantee will make it significantly more likely that you will get that loan. If you decide you are willing to sign on the dotted line, you will find your options for financing open up considerably.

? For small or medium-sized businesses without the necessary capital in their business, access to finance fast can be the difference between success and failure.

? You may well reach the conclusion it’s a risk worth taking to get that finance. If you do, it may be possible to negotiate the percentage of the loan you should guarantee.

? The risks can also be cut significantly by taking out insurance which incrementally mitigates against potential financial loss over a three year period – up to 80% of the cost of the debt.

? It may be possible to negotiate out of a personal guarantee, but the process is difficult.

The Cons:

? Stating the obvious, we can’t predict the future and while you might have a sound business plan, events outside of your control can throw these plans into disarray. (Dare I mention the B? word again?)

? If in the worst case you do default on the loan and a claim is made under the guarantee, you and any other guarantors will be liable to pay the company’s debt and all your personal assets will potentially be on the line.


 
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