Personal Guarantees: A director’s guide

To secure business financing, you may be required by lenders to provide a personal guarantee as director of your company. This typically has positive impacts for your business but it can potentially have negative effects on you personally.

Providing a personal guarantee lowers the lender’s risk and can open up more borrowing opportunities for the business – maybe gaining access to a broader selection of lenders, for example, or being able to apply for more money.

But what exactly is a personal guarantee and how does it work?

What is a personal guarantee for business borrowing?

A personal guarantee is an agreement provided by you as a limited company director that becomes legally binding as soon as it’s signed by both parties. It states that you agree to repay the outstanding monies on a company debt if the business cannot afford to pay.

It minimises the lender’s risk of providing the financing but places your personal assets in danger and increases the potential for you to be made bankrupt. This is because the lender has the right to pursue you through the courts for repayment.

Personal guarantees can be joint and several, which means that you can be held responsible for repayment of the debt along with other directors named in the guarantee or any one of the guarantors can be pursued individually by the lender.

Limited and unlimited personal guarantees

If you sign a limited personal guarantee, you limit your liability for an unpaid business debt to the amount stated. This offers some protection for your assets and a little reassurance if the business starts to decline financially.

As the name suggests, with an unlimited personal guarantee there is no limit on your liability, which significantly benefits the lender but can have serious financial repercussions for you if the business fails.

Advantages and disadvantages of providing personal guarantees

Advantages

• Lenders may offer lower interest rates due to the reduced risk
• Your company gains access to a wider range of finance products
• You may be able to negotiate the terms of a guarantee

Disadvantages

• Your personal assets, including your home, are placed at risk
• The lender could force you into bankruptcy
• Your credit rating might suffer if the guarantee is called upon and you cannot afford to pay

Personal guarantees and insolvency

It’s important to note that if your company enters insolvency and cannot be rescued, the personal guarantee you provided is still enforceable by the lender and you could face bankruptcy alongside your company’s liquidation.

You do remain liable to repay the borrowing according to the guarantee but in some cases, it may be possible to negotiate with the lender on the terms of the guarantee if you cannot afford to pay.

It’s highly advisable to seek appropriate professional expertise in these circumstances and also to have the validity of the guarantee checked for errors that might have been made when drafting the agreement and that could nullify the guarantee.

Should you sign a personal guarantee?

It’s vital to obtain independent advice before signing a personal guarantee and to carefully consider whether the terms place your personal assets at unnecessary risk. There are other steps you can take that will help you decide whether or not to sign.

Taking out personal guarantee insurance to protect your assets is an option, as is negotiating with the lender to reduce the limit of your liability under the guarantee before you sign it.

In good times, signing a personal guarantee may not seem too risky but the nature of business means your company could suddenly experience cash flow problems. Establishing how well your company is faring financially helps you assess the risks and decide whether the benefits of providing a personal guarantee outweigh the potential drawbacks.