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What do you need to know about providing a Personal Guarantee (PG) when taking out a loan? Here is your chance to discover how giving a Personal Guarantee could cut the cost of your business finance and give you increased opportunity to shop around.
Online law firm LawBite and find-and-compare business financing platform, Alternative Business Funding have come together to answer your questions and guide you through the benefits and risks, both financial and legal, of taking out a loan.
If I give a Personal Guarantee why be a Limited Company?
I can see where you’re coming from but it’s not as black and white as that or as negative. Your PG would be limited to a specific amount for agreed liabilities. You are not necessarily signing everything away as the remaining liabilities outside of that guarantee remain the responsibility of the company.
It is however really important that you fully understand the terms of the guarantee, and that it only covers what you are expecting it to cover because all guarantees are different. Some guarantees may ask for a legal charge over the guarantors home (although many don’t), others may not have any termination rights and last indefinitely, and some are “all moneys” guarantees in which case you would be liable for all of the debts and obligations of the company to that lender.
You need to understand the consequences of the terms of the guarantee and you should definitely seek professional advice before you sign it if you have any questions about the extent of the guarantee, your liability under the terms of the guarantee or the effects it could have on your financial position. Simply put it’s best to be completely clear about what you’re signing up to.
But I’m still responsible for what I have guaranteed?
Yes, but the prime responsibility for the debt still lies with the company itself and, providing that the company keeps to the original funding agreement, there is no problem. Indeed, even if there is a breakdown, such as problems repaying, then the lender will generally work with the borrower – i.e. the company – to try to come to a mutually acceptable arrangement. Even if that fails the lender would normally have to go through various procedures, including issuing a formal demand for repayment to the company, before calling on the guarantee.
However it is important to be aware that as you will be personally liable under the terms of the guarantee, if the company defaults, the lender may look to you for repayment of the debt under the terms of the guarantee. It’s also important to know that the lender is not obliged to take any steps against the company before enforcing the guarantee so if you want enforcement of the guarantee to be conditional on the lender having to first enforce its security over the company’s assets then there needs to be a specific clause in the guarantee for this so make sure this is the case.
Good news but I’m already putting in cash, why a guarantee as well?
Another question that is often asked but remember what is at stake here. You are the business owner, who stands to benefit from the increasing profits from a growing business, whereas the lender is providing a specific amount of funding for an agreed but finite return. If the business is a huge success you gain significantly whilst the lender will still only get the same defined return on their funds.
Whilst on the subject of cash flow and profit, if you’re the sole director and the only person signing a guarantee, then you will be fully aware of the company’s state of affairs. If there is more than one director, then ideally you need to make sure the guarantee is not an “all monies” guarantee which means the liability of the guarantee could be extended to further borrowing. Also, you should consider all directors signing a guarantee but this does not mean (unless the guarantee states otherwise) that the lender has to claim against each guarantor. This is because most guarantees will hold each director jointly and severally liable so in reality the lender will chose to enforce the guarantee against the director with the most money or assets.
Yes but they are charging interest . . .
You’re right, they are providing debt on which they charge interest, not equity or risk capital which would involve them seeking a far higher potential reward than the interest rate they charge. Also, as lenders, part of their role is to minimise their risk as far as possible. Having a guarantee in place, does mean that they have somewhere else to turn if things go wrong, plus the general feeling amongst lenders is that a PG tends to focus the mind of the guarantor in keeping the debt as low as possible when things aren’t going well. “Skin in the game” is a phrase often used.
It is important that you are fully aware of the amount of interest being charged and clear on what the total costs will be so that you can consider if any risk outweighs the benefit of obtaining the loan and signing the guarantee.
But it won’t go wrong . . .
In which case the guarantee will never be called upon, and you will benefit from the growth enabled by the original funding. A bit simplistic, but you could look at the guarantee as an umbrella for the lender in case of rain.
However you should be aware of what to consider if things don’t go to plan – you will be jointly and severally liable with the company for any debt secured under the guarantee – which means that the lender might look to you solely to pay the debt, if the company defaults on the loan. In that case the lender can consider whether to enforce the guarantee through the County or High Courts, or issue a Statutory Demand for the outstanding amount which does have consequences if not paid.
So there are real benefits to giving a Personal Guarantee?
Yes, primarily many more funders will be willing to help you. Many funders will not lend without PGs, particularly to young businesses. Also, as mentioned before, the guarantee reduces risk for lenders. Increased choice and reduced risk usually equal lower price. Agreeing to give a Personal Guarantee is likely to save you money.
With all the benefits in mind, as a general rule, when considering a guarantee, you should consider obtaining legal advice and try to ensure that the guarantee:
• Only covers the specific loan that you are guaranteeing, and that it cannot be increased for further borrowing without your specific consent (especially if there is more than 1 director of the company); if this is not possible, make sure that the Guarantee is limited in amount
• Is automatically terminated once the loan has been repaid; if this is not possible, make sure that you cancel the Guarantee once the loan is repaid
• Includes a clause that allows for termination of the guarantee (this will be subject to certain conditions set out in the guarantee) as the general rule is that you cannot terminate the guarantee by giving notice unless there is provision for this;
• Is, if possible, limited to proportion or percentages of liability for the debt if more than 1 director is signing the guarantee;
• Sets out fully your liability should you leave the company but the company continues for trade so that you are fully aware of the extent of your liability;
• Has an express agreement, if possible, that the guarantee is conditional upon the lender having to first enforce its security over the company’s assets before they can enforce the guarantee.
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