A personal guarantee refers to an agreement that implies that a business director assumes responsibility for a particular debt of his/her company if the business is unable to pay it back.
Many business operators consider personal guarantees if it ensures they can access business overdrafts or credit facilities that they can manage. The lender also prefers it because the directors take responsibility for payment alongside the company.
If you are considering your Director Personal guarantee exposure, there are some things you must know before you get started.
Reasons for personal guarantee arrangements
One of the most prominent reasons is that people offering loans to small or medium businesses want an assurance that they won’t lose completely if the company can’t repay the loans.
While these guarantees offer the finance providers reassurance, they allow these businesses to access necessary funds for their operations.
Personal guarantees might become necessary in cases such as asset leasing, bank loan applications, property leases, Invoice finance arrangements, and Trade supply deals.
Pros and Cons of Personal Guarantees
The pros of personal guarantees include the fact that they offer added financial options to companies, whether small or large.
However, one pertinent downside is that giving personal guarantees could lead to rising and piling interest rates on a person’s overall indebtedness, especially on large debts. If the company fails to pay back, the director becomes personally responsible for large debts. In the case of bankruptcy, they might need to sell their properties to settle the debt.
Not only the director’s personal savings and assets can be seized, but even a family property co-owned with other family members can be seized.
Corporate insolvency in personal guarantees
When a business enters corporate insolvency, the extent of involvement or responsibility a director and his assets bear will depend on the nature of the personal guarantee that was given during the signing of the deal. This is why it is important to understand all potential risks and outcomes before signing personal guarantees during a business loan arrangement.
Setting a limit on liabilities
Director Personal guarantee exposure is very necessary to consider when a personal guarantee deal is being set, there is a need to set a cap on how much liability the director will take up. However, it is often difficult to set or negotiate this cap when a company is facing dire financial challenges.
So, it behoves directors to consider their liabilities cap and insist on it before signing any personal guarantee agreement with a financier or institution.
Things to consider before providing personal guarantees
The first thing to do before opting for personal guarantees is to get legal and personal advice concerning the state of your business and your personal finances. Different agreements determine the level of liability the director assumes, so you need an expert to study the subtle differences and advise you.
When confused during your deal with a lender, ensure to demand clarity. Always ensure you have this clarify before signing to be sure about the scope of your responsibilities.
It is also advisable to consider other options for securing those funds because the stakes for personal guarantees are often quite high. So, before you provide a personal guarantee for your business, always explore all options to be sure as there might be some other alternative.
If it is possible for you to secure funds for your company with personal guarantees, that still might however be the best option for you.