As a Company Director, circumstances may arise where you find yourself in a position to offer a personal guarantee to support a line of credit. This may seem like a decision worth taking to enable your company to move forward and reach its true potential; however this does not come without risk. In a situation where a company is unable to maintain its debts and is in a position of financial distress, a personal guarantee can often become a cause for concern for directors, and in the current climate, where the viability of businesses is a major worry, offering a personal guarantee has an increased risk.
A personal guarantee is a promise made by an individual to personally pay back any amounts owing to a Lender should a company not be in a position to pay back the amounts borrowed. A personal guarantee provides a lender with extra security should a company default on its obligations.
There are a range of scenarios in which a credit provider may ask a Director to provide a personal guarantee. Some of the most common include:
The most obvious benefit of providing a personal guarantee by a director is that it will improve a company’s chances of securing credit. Providing a personal guarantee may open up new lines of credit or may mean that a company is able to access a higher amount of funding.
If you have recently started a new business you will have no recent trading history and may encounter difficulty in obtaining funding; this may be through obtaining loans and other facilities, or include opening Trade Supplier Accounts. By providing a personal guarantee, this may help you to secure credit for your company.
The benefits of providing a personal guarantee do not however come without some risk. Should your company default on payments of credit, or become in a position where it will be unable to pay creditors back, you will become personally liable.
Without a valid personal guarantee, creditors are unable to pursue directors personally for amounts owed.
For some directors whose companies are in financial difficulty this may lead to long-lasting financial problems on a personal level, jeopardising personal assets and plans for the future.
Before providing a personal guarantee, careful consideration must be given to ensure that you are comfortable with all of the terms of the guarantee. You should always ensure that you obtain appropriate legal advice to establish this.
Key considerations include:
You should ensure that you are aware of all personal guarantees that you have given and how these may affect you personally. You should take steps to establish the impact by:
Establish your own personal position by undertaking a review of your own assets and liabilities.
You may be looking to obtain new funding in order to support your business during the current pandemic. This may be through a Coronavirus Business Interruption Loan Scheme (“CBILS”) loan or Bounce Back Loan. Key points relating to personal guarantees are:
Giving a personal guarantee may help you to secure new finance for your company however this does not come without some risk.
You should always obtain independent legal advice prior to undertaking a personal guarantee.
If you are concerned about your position in regards to personal guarantees undertaken and what this means for the future, seek advice early.