
Feeling compelled to put the kettle on? Go for it, we want you settled, hydrated and ready for our handy guide to the Personal Guarantee. Oh, and whilst you're at it, we like ours strong with a dash of milk.
In it's simplest form, a personal guarantee 'PG' - also know as a director's guarantee - is a form of security that puts a guarantor 'on the hook' for a company debt and if documented correctly, is a legally binding agreement. In taking a guarantee, a lender will make the guarantor personally liable for any debt owed in the event a company becomes insolvent.
Normally, if your business is incorporated (i.e. a limited company or limited liability partnership), the company directors or partners won't be personally liable for any debts a business takes on. However, providing a PG changes this by making the directors or partners, as guarantors, legally obliged to repay a debt if the business is unable to.
Why Would I Give A PG Then?
Providing a PG can facilitate access to the finance your business needs to improve cash flow, recruit additional staff or invest in new equipment. Without one, it might be difficult to obtain the business funding you require to support your needs and goals.
Typically, a lender will seek a supporting PG when the proposed lend is close to risk parameters or the company credit profile is deemed to be weak. They're common with early stage businesses and short-term, unsecured business lending where no tangible asset security is available.
As well as minimising risk to the lender, having a vested interest from a director(s) or partner(s) who is willing to take on some personal risk, can be viewed as a strong indicator of management confidence and their commitment to the business.
Ultimately, a PG can help your business access the finance required to support your strategic goals and aspirations. It may just provide the extra reassurance a lender needs to tip a credit decision in your company's favour.
Key Considerations
Lenders generally use a blanket personal guarantee agreement, typically drafted in-house, with terms differing from one funder to the next. As such, there are some key areas to look out for when reviewing any draft documentation:
What constitutes a company default?
Is the guarantee limited or unlimited (capped or uncapped)?
Is the guarantee supported by charges over personal assets such as your home?
How will the guarantee be enforced?
Is there any allowance for a remedial period?
Will all other avenues be exhausted before demands are made on the guarantor?
Will notice be served or can payment be called on demand?
OK, What About Protecting Myself?
If a guarantor wanted to reduce their liability, options are available such as personal guarantee insurance which is designed to provide cover in the event of a lender taking enforcement action.
Policies tend to cover a fixed percentage of the guarantee rather than the full amount with pricing generally driven by the guarantee amount and credit profile of the underlying company.
Alternatively, and if appropriate, splitting the liability across multiple directors or partners to spread the risk, could be another option to consider.
Tread Carefully
Whilst the provision of a PG might open up additional funding options for your company, any prospective guarantor should exercise caution until they fully understand the potential implications of guaranteeing a company debt.
Remember to be objective when considering the future prospects and financial performance of the company you're considering serving as a guarantor for. This is not a hypothetical assurance and assuming the contract is documented correctly, in the event of company insolvency, lenders can and will enforce them.
We recommend seeking appropriate legal advice to ensure you're comfortable with the proposed contractual agreement and the impact on your personal assets, should the guarantee be enforced.
As always, if you wish to learn more about personal guarantees, or any other form of lender security, get in touch with the team at KeySME - We're here to help you navigate what can be a complex subject!
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