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Have you signed a personal guarantee?

Have you signed a personal guarantee

As a small business owner you have probably come across personal guarantees perhaps with suppliers or your banking and lending institutions and may have even signed one or two (hopefully not too many), but do you really know what power and rights are created by signing a personal guarantee? I suspect that most individuals are not fully aware of the potential ramifications should a default occur on the debt and the exposure to the personal guarantee is brought into play.

A personal guarantee is defined as an agreement created between a director or group of directors of a company that requires a credit facility and a third party creditor, usually a lending party or a supplier issuing credit terms.

The most critical piece of advice with a personal guarantee is that they do NOT require the company to be insolvent or in liquidation before the holder of the personal guarantee can pursue the individuals for recovery of the overdue debt. However, if a company is in liquidation then this means that the company cannot pay its debts and the lender can call on the personal guarantee. Should a company go as far as being in voluntary administration then the personal guarantee cannot be enforced until the company is out of voluntary administration.

In order to protect yourself as much as possible, assuming that the personal guarantee is unavoidable in your situation, always take the following action:

  • Seek a limit on the guarantee. If there are four business partners seek to limit your personal guarantee to 25% of the total debt being called on by the lender.
  • Structure the personal guarantee to only take effect once certain limits are met, i.e. the number of monthly payments missed.
  • Always avoid joint and several guarantees and seek indemnification from the other directors.
  • Leave your spouse out of it and do not have them sign the guarantee. Personal assets under your spouse’s name are then afforded protection against an activated personal guarantee.
  • Investigate personal guarantee insurance for your share of the debt, potentially 100%! This gives you peace of mind knowing that if you pass away your family will not be burdened with the debt in your absence.
  • Finally, give careful consideration to whom you are signing the personal guarantee with.

As you can see there is so much more to a personal guarantee than just signing a piece of paper to access needed finance. Always, take the form away and get independent advice separate to the other directors. Never ever sign it on the spot no matter how much pressure is placed on you.

 
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