Many business owners think the fact they are directors of a limited company will in turn limit what they are liable for when borrowing money. The truth is that many lenders will require a personal guarantee (PG) from any person that also has a significant stake in a business (i.e. more than 25%). This may be limited to a set amount, or it could be for the full amount borrowed.
The thought of giving this PG fills many business owners with dread, so let’s have a look at the reasons why lenders tend to take them. For many, it is a sign of commitment. It’s the business owner’s way of showing that they are fully committed to their business, and so the lender should be confident in lending to them. The lender may be thinking “why should I put my money in, when you won’t even back yourself?” – in these cases, you will often find that the PG is limited to an amount much smaller than the facility itself.
Other lenders will need the Personal Guarantees to cover the facility in its entirety. These can obviously have much bigger consequences if called upon and so the reasoning needs to be understood and considered further. These facilities tend to be higher risk and generally there is not additional security in terms of bricks and mortar security or a debenture as a result of prior lending. The lenders only way of recovering their cash is through the Personal Guarantees, and so the PG needs to be for the full amount.
Personal guarantees can be called upon either when a facility is not being serviced or repaid, or when an event of default occurs. Typically, this is any type of insolvency. In these cases, it is key to talk to your lender, understand what their position is, and work together to find a resolution. If you are pre-packing a business, you may be able to novate the debt into a new company. Repayment plans can be discussed. The key is to not bury your head in the sand. Open honest dialogue between you, your insolvency practitioner, and lender should be held as soon as you are able.
Of course, there are also facilities which do not require any Personal Guarantees. However, these tend to be more balance sheet driven and only available to businesses which demonstrate strong financial performance.
If you are worried about giving a Personal Guarantee, then personal guarantee insurance can be taken. It may not cover the full amount, but it will provide some comfort. The guarantees are provided by third party insurance companies. Other insurances, such as credit insurance, can limit the impact of a bad debt and therefore take away the necessity of enforcing a PG. Please get in touch if you’d like to find out more about these insurances.
The key takeaway is to consider all aspects of the facilities you take, and what affect they can have on each other. If you have multiple facilities, all secured by a Personal Guarantee, and one goes wrong, what happens to the rest? Can you support the PGs you are giving, or are you simply hoping the issue will never come up?
If you need to review your current facilities and assess the impacts they could have on your business, then get in touch for a chat