Personal Guarantees - What Are They And Is It Possible To Get Out Of One?

Are you familiar with personal guarantees? Without such assurances, businesses may find it hard to secure the funds they need. However, before signing a personal guarantee agreement, you should familiarise yourself with some of the possible as your own personal assets could be at risk of things going wrong. Evaluate all potential scenarios thoroughly prior to making this commitment.

Before signing a personal guarantee, it is essential that you consider the implications of the company defaulting on the payments. This knowledge is even more critical if your business starts to experience financial difficulty or insolvency. In this blog post, we will investigate what a personal guarantee means for you and examine if there are any opportunities to get out from under one.

Personal guarantees - What are they?

A personal guarantee is something that a lender may require a company director (or directors) to agree to in order for the source of credit to the company to be approved. The business owner is accountable for a personal guarantee, a legal commitment to honor the loan in case their business fails to make payments. By providing these guarantees, lenders gain the necessary assurances that they will not suffer any losses due to failure of repayment from the company.

Although it is permissible to have multiple directors provide a personal guarantee to the same lender, this will not reduce any individual's liability. If payments are not made in full and on time, the lender may choose to pursue action against one guarantor or all of them - either way being liable for repayment remains unchanged.

it is important to differentiate between a company director and a sole trader. A sole trader will be entirely personally responsible for all business debts.

Why are personal guarantees considered a necessity in running a business?

A personal guarantee is something a business owner is likely to encounter when applying for business loans, invoice finance agreements or property & vehicle leases.

When a guarantee is asked for, the real reason behind it lies in the company's lack of established credit history and score. New business or small business owners may not have built up enough trust or credibility to be eligible for business loans from external creditors. Thus, obtaining guarantees enables these businesses to secure financing when other financing methods are not possible.

By personally guaranteeing business finance, the director of a company adds their own personal creditworthiness to make the application even more attractive and gives lenders added assurance. This is likely to increase the chances of the business finance application being approved. As part of this process, the lender will look at any personal assets such as a property held by company directors that can be used as collateral in case payments are not made. Doing so provides a safeguard for debt repayment as liquidated funds may become necessary.

Personal guarantees and the risks of insolvency

Issuing a loan at the right time can be the difference between a company achieving success or becoming insolvent. However, when providing financial assistance to a business with unstable finances, it is essential to have assurance. A director often proposes a personal guarantee in such circumstances for extra security; this sort of thing is not unusual.

If a business fails and is unable to pay its outstanding debt, the director of that company will be held personally liable if there was a personal guarantee. If they are unwilling or unable to make payments on those debts, creditors may take legal proceedings against them by seizing their personal possessions as payment. Should this unfortunate event come to pass, it could lead to bankruptcy for the directors in question- an outcome with potentially devastating implications for any future endeavors.

Are you a director that had signed a personal guarantee on for a company that has failed to repay it's debts? If you are worried that the additional financial burden is (or will) have a devastating impact on your personal finances and personal assets, it would be wise to contact an insolvency practitioner sooner rather than later to see what options you have. Taking action now can help to reduce or eliminate the negative impact on your life and personal finances.

Personal guarantees - Can you get out of one?

Unfortunately, it is impossible to escape a personal guarantee - no matter how hard you may try.

Before agreeing to a personal guarantee, you must be fully aware of the conditions. No lender would take such a risk without thoroughly reviewing its reliability first. The good news is that there are multiple ways to reduce the extent of your liability through these deals; if accepted by your lender, you can choose between an unlimited and limited agreement. A "limited" guarantee will significantly lessen your responsibility as it caps at 100%, making it more attractive for individuals like yourself who seek maximum protection from any financial losses incurred when signing this type of document.

To protect yourself and your own assets from some of the risks of taking on a personal guarantee, you may want to consider purchasing Personal Guarantee Insurance (PGI). Personal Guarantee Insurance typically reimburses up to 70% of the guarantor's liability, which can be a great option. While it is always ideal if you are able to come up with terms beforehand, having this insurance in place will offer an additional layer of security for your investments and obligations. It may also be possible in some scenarios to renegotiate the terms of the guarantee with the lender to minimise the impact you your personal finance. In summary, protecting yourself from personal guarantee liabilities can either be accomplished through obtaining personal guarantee insurance or negotiating promising terms. It's best to do this before things become too convoluted.

It is always wise to try an renegotiate any agreement prior t the company entering into insolvency. Furthermore, you may be eligible for personal debt remedies such as declaring bankruptcy or initiating an individual voluntary arrangement (IVA) where a payment plan is established based on the total amount of debt. A debt solutions company such as Become Debt Free will evaluate each situation independently and provide you with personalised advice tailored specifically to your situations.

Personal guarantees - Are they legally enforceable?

In accordance with the law, a personal guarantee is legally binding. It's essential that these contracts have been carefully reviewed to guarantee their validity; however, those who've attempted to dodge their responsibilities through High Court proceedings haven't succeeded in doing so.

Before agreeing to a personal guarantee, it is important to completely understand the potential repercussions should the company no longer be in a position to repay the debt and you become liable for it.

Personal guarantees – Final thoughts

In this blog, we've delved into the world of personal guarantees and how they can be used as a formidable mechanism for securing funding and propelling a business onward. Nevertheless, any individual who agrees to a personal guarantee agreement should understand the impending risks associated with their decision-making process.

If you are a business owner of a struggling company that you feel is no longer solvent, contact a business insolvency specialist such as Company Doctor. Their advisors will discuss the situation of your company and what the implications of having a personal guarantee on any of the business's outstanding financial liabilities.