Cut the risks of Personal Guarantees - Business Works
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Cut the risks of Personal Guarantees

by Todd Davison, Director, Purbeck Insurance Services With Britain's top banks reaffirming their commitment to back British business through access to finance, ahead of Brexit, Todd Davison, Director, Purbeck Insurance Services says that small business owners should not be put off by the need for a Personal Guarantee.

Whether it is to help with cash flow, buy new equipment or move premises, access to finance can make or break a growing business, for some, a business loan requiring a Personal Guarantee may be the only option. While it's all part of the risks of running a business, for some it's a step too far.

In our study, 1 in 10 small business owners (12%) decided against taking out a business loan because it included a Personal Guarantee. That's understandable, but worryingly, 39% of small business owners in the same study confessed that they were not aware their personal assets such as their home and life savings could be at risk.

The fact is there are ways the risk of a personal guarantee can be cut such as sharing it with other business Directors and taking Personal Guarantee Insurance. It's therefore vital small business owners and Directors arm themselves with the facts and seek expert independent advice before either dismissing a Personal Guarantee backed loan or signing on the dotted line.

What is a Personal Guarantee?

Personal Guarantees are a written promise made by a Director or number of Directors to the lender accepting liability for a company's debt. This means if the business defaults on a loan the Director's home, car and anything in their personal bank account could be used to settle the debt.

Jointly owned assets, such as a home, require the joint owner (for instance a spouse or partner) to sign the guarantee, even if they are not involved in the business in any way.

Personal Guarantees can apply to a wide range of finance facilities, whether from a traditional lender, Peer-to-Peer Platform or as part of an asset finance deal. They may also include loans secured through lenders backed by the Enterprise Finance Guarantee.

The benefits of a Personal Guarantee

The main benefit of using a Personal Guarantee is it can open options for financing, particularly if a business needs access to finance fast and hasn't built up adequate assets in the business entity to provide security to the lender.

The risks of a Personal Guarantee

As well as the risk to personal assets which could be called in to pay back the debt, if the value of the assets aren't enough to settle the debt, the Guarantor could find themselves facing bankruptcy which has longer-term ramifications.

It is therefore imperative those signing on the bottom line fully understand what they are committing to, the implications of what may happen if things don't go according to plan and how to mitigate against those risks.

Key points to check when signing a loan requiring a guarantee

  • How will the lender enforce the guarantee?
    The usual route is for the creditor to issue a Statutory Demand and give 21 days to either settle the debt or reach an agreement to pay. This may vary depending on creditor and the amount being called on.

  • Can the lender serve notice or seek payment on demand?
    Creditors can be more or less generous with their payment terms, and can seek payment on demand.

  • What exactly constitutes a default?
    Some loan providers will see just 24 hours as a default and take steps accordingly to recoup the debt. Others may be more lenient.

  • Do the terms allow for any remedy period upon default?
    Some creditors do allow a specified timeframe for you to pay back the default - others don't.

  • How will your net personal assets be assessed prior to the giving of the guarantee and is this is likely to change?
    Many providers of personal guarantee loans ask for a personal financial statement. The format is standard and shows assets on the left and liabilities on the right. Others may require more proof of the value of your assets.

  • Does the contract state that the lender must exhaust every other avenue before making demands on you?
    Some lenders are prepared to look elsewhere, such as to business assets before calling in the debt.

Signing a personal guarantee is not a commitment to be taken likely - it puts personal assets on the line, but a finance professional such as a broker, accountant or solicitor can advise on the ways the risks can be cut.

This includes Personal Guarantee Insurance, a relatively new type of protection, which offsets any outstanding obligations called in by a lender and includes access to mentoring services to support businesses through financial stress.

For more information, please contact: Purbeck Personal Guarantee Insurance

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