As a business grows, it is common to need to borrow extra funds. This could be to aid cash flow, working capital or to fund expansion. What is equally common, is for lenders to ask for a Personal Guarantee, but before you agree, there are key considerations.

What is a Personal Guarantee?

This is a legal agreement from one or all Directors who agree to personally cover a Company’s debt if the business cannot cover the amounts due itself. The Directors are the Guarantors.

All personal assets of the individuals are placed at risk, including their home, car, savings and any other personal assets.

The importance of legal advice before providing a Personal Guarantee

Given the personal risks involved for those providing Personal Guarantees, it’s essential that sound financial and legal advice be obtained beforehand. If the personal assets are jointly owned, it is usually a requirement that the spouse or partner seek separate legal advice to ensure they understand the potential implications of the Guarantee.

Would the liability be shared equally amongst each Guarantor?

Not necessarily! If Guarantees are provided by several individuals, it is usually on a  ‘joint and several liability’ basis. This means that the lender can seek to recover the total amount due from one individual if their assets are easier to liquidate or accessible. There is no requirement to seek an equal amount from each, unless this is specifically written into the contract.

Are Personal Guarantees actually enforced?

Yes! If they are though, you should seek further legal advice, to ensure the terms of the contact are being adhered to. It is usual for the lender to apply for a Court judgment, but this is usually after the Guarantor has been advised of the action, and may be after the services of a Debt Collection Agency have been employed. All costs are likely to be added to the debt amount.

How quickly after default will the Personal Guarantee be collected?

This will depend on the terms of your contract, but also on the lender. Some will allow a period of grace for the debt to be reduced, others may be less lenient and start proceedings very quickly if the company defaults, particularly if there is a history of cash-flow problems or late payments.

Can we do anything to reduce the risk to the Guarantors?

1. Ideally, ask the lender to look at other sources of security instead of a Personal Guarantee, such as a  charge over the assets of a company or the business premises.
2. If possible, limit the liability to a specific liability or amount, rather than ‘all liabilities’.
3. Ask for a clause to be added to the contract to require the lender to liquidate other company assets before calling on the Guarantee.

Your legal advisor should be able to assist with the different clauses that may be possible.

In a survey of 500 SMEs carried out by Census Wide in March 2019, 60% of respondents were unaware of the full risks of signing a Personal Guarantee. If you are considering finance, be sure you do not fall into this category.

If you are seeking finance, whether for business growth or any other reason, please do get in touch. We can help with forecasts and business plans and also introduce you to various sources of finance that may be far more creative and affordable (and successful!) than the traditional banks or Funding Circle.