Structuring your business as a limited company limits your personal liability and financial obligations, in relation to your business related debts and the contracts it enters into.
However, a lender or supplier may insist that directors sign a personal guarantee as security for a company's borrowing. This personal guarantee then empowers the lender to legally demand repayment of a debt should the company default.
In today's unprecedented economic times, you would be well advised to seek experienced legal advice if asked to sign a personal guarantee - no business owner can be complacent about becoming personally liable for business debt and any claim on personal assets.
It is important for individual directors not to overlook the potential downsides to signing a personal guarantee. If being asked to sign one, you should be asking if the company is financially viable? Is the company facing significant financial pressures with cash flow concerns? Is it hypothetical and a highly unlikely scenario, or is it becoming all too real?
When is a personal guarantee required?
Personal guarantees from company directors will nearly always be required for:
- Bank Overdraft
- Commercial Rent
- Trade Credit
- Unsecured Business Loan
- Invoice Finance
- Property Loan
- Leasing Agreement
The advantage of entering into a personal guarantee is that they provide the ability to obtain financing for your company. If a business is experiencing cash flow problems, an injection of funds can make the difference between continuing to operate or having to close.
Furthermore, personal liability can be capped, but it will be up to you to negotiate hard to ensure your liability does not result in your personal financial situation being jeopardised.
How to cap liability under a personal guarantee?
The healthier your company's financial position is, the more leverage you will have in negotiating a cap on your liability under a personal guarantee for a company loan.
The most important factor in limiting your liability is to start negotiations as early as possible after you have received legal advice on which points of the agreement the lender may be willing to be flexible on.
What if my company falls into insolvency?
It is generally difficult to get out of a personal guarantee if your limited company becomes insolvent, as this is the type of situation lenders require a personal guarantee for. You should however always seek advice as there may be flaws. Rather than admit liability, take advice as soon as possible on any claims from a creditor. Time will be of the essence.
Your choices regarding the personal guarantee are:
- Challenge the validity and enforceability
- Pay it in full
- Negotiate payment terms, either reduced amount or payment plan
- File for personal bankruptcy or enter an IVA
Of course, option four should only be taken as a last resort. You should never contemplate this option without taking specialist advice from a qualified insolvency practitioner.
Although you may feel under extraordinary stress there are options and genuinely if there is no money to pay, a creditor will be realistic and will likely negotiate payment terms. It is however important as to how this is presented in the financial statements of any business.
Other options instead of a personal guarantee
Many firms are seeking business loans as a source of survival. At this time, there are government-backed lending options
that do not require a personal guarantee which you may consider.
The Bounce Back Loan Scheme, launched in May 2020, was introduced to help smaller businesses impacted by coronavirus. It aims to assist businesses to borrow between £2,000 up to 25% of a business' turnover (the maximum amount available is £50,000).
The Government will cover any interest payable in the first 12 months through a Business Interruption Payment to the lender, and lenders benefit from a 100% government-backed guarantee.
A lender is not permitted to require personal guarantees for the Bounce Back Loan Scheme.
Under the Coronavirus Business Interruption Loan Scheme, CBILS, there are no personal guarantees for any facilities below £250,000, although other forms of security may still be required by the lender. Security, including personal guarantees, may still be required for facilities above £250,000 but they exclude a borrower's main home; and recoveries are capped at a maximum of 20% of outstanding
Other questions you may ask centre around whether just borrowing more money will make a difference. Business owners can be notoriously blinded by the need to keep the business alive.
However, if you must provide a personal guarantee, ensure that you have the contract reviewed by a qualified Solicitor. You must understand the extent of the business liability and your obligation towards the company's financial position, so you are in a position to negotiate terms in your favour.
LawBite offers a 15-minute, free consultation with an expert lawyer for independent legal advice to discuss your options with regards to a personal guarantee or potetinal insolvency with a qualified insolvency practitioner. We also offer a low cost contract review service if you want to firm up on your options. Visit www.lawbite.co.uk
for more details and speak to us further.