What is a Personal Guarantee?
Lenders, suppliers and landlords may ask a business owner or Director for a Personal Guarantee before agreeing to lend to the business, rent or lease premises to the business, or supply goods on a credit account. If there is more than one owner or Director, all parties concerned will be asked to make the guarantee. A Personal Guarantee from a Director means that the lender or supplier can seek to recover debts from personal assets when the business doesn’t have enough cash or assets to repay the debts. This means that a Director’s own home, car and personal possessions could be at risk if the business becomes insolvent.
Why do lenders ask for a Personal Guarantee?
Lenders need to protect themselves if the company they’re lending to becomes insolvent. When making a decision about lending to a company, they’ll look at a number of risk factors. If the business is not well-established, has a poor company credit rating, or no history of previous borrowing, it’s quite likely that a PG will be requested. In this way, the lender is asking the Director or Owner to make a commitment to their business and show that they will work hard to ensure debts are repaid, otherwise they are prepared to potentially lose their personal wealth too.
Do I have to make a Personal Guarantee if I want a business loan?
It is common practice on the part of lenders to ask for a PG, but one that many business owners seem to brush aside in their haste to borrow the money or are simply unaware of the ramifications of giving such an undertaking. Naturally, lenders don’t make decisions based solely on PG’s. The business proposition must be sound and have a good prospect of success before they will lend, and loans are available even if the directors do not have much in the way of personal assets. Sometimes wealthy people are not approved for a loan because the proposal or even the business itself doesn’t stack up – there must be a good case for the loan and proof that the business can repay it.
Is it risky for me to enter into a Personal Guarantee?
No one can foresee the future. If there is a recession of some kind, then many ‘sound’ businesses can and do fail. Loss of significant team members or suppliers can cause business interruption that can lead to cash-flow problems and insolvency. If you’re going to enter into a Personal Guarantee, think carefully about what you might be at risk of losing if you were faced with substantial debts. Would it be your life savings, luxuries like your car or motorhome, or could you at worse make yourself and your family homeless?
In some cases, it is possible to negotiate with lenders over settlement of PG’s but nevertheless, it can be devastating to lose a business and the income/drawings that you take from it, and then have a Personal Guarantee called in, which if unpaid can then resultin formal insolvency proceedings. You could find yourself without a job and in a position that makes it much harder for you to find new employment or to start a new business.
What’s R2B’s experience of Personal Guarantees?
We talk to Directors of companies in financial distress every day in our line of work, and we’ve seen first-hand the actions some creditors take as a matter of process. Cutting loose a failing company is not always as straightforward as it may first seem, so before you enter into any financial agreements seek professional advice and guidance.
If you find yourself struggling with cash-flow and as a result unable to repay business debts covered by a Personal Guarantee, talk to us first. Our Business Turnaround and Creditor Negotiation Services can help you to get back on track without needing to fall back on your personal assets.