If your limited company is struggling, it can be very tempting to take out a Director’s guarantee to help revitalise your business.
It’s not uncommon for directors to use their own finances to prop up a company, particularly in the short term.
However, it’s important to remember that you will be unlikely to see that money again should your business eventually fail.
As a limited company is considered a separate legal entity, you are not personally responsible for your company’s debts.
However, as a director, if you have signed a personal guarantee and your company cannot repay its debts, you will be held personally responsible.
(You might also be interested in this article that explains the liquidation of a company in detail)
What is a director’s guarantee?
A personal guarantee is a legal promise to repay credit issued to a business you serve as a director.
This agreement means that if your business is subsequently unable to repay its debts, then you will assume personal responsibility for the outstanding balance.
When you enter into a personal guarantee, you take on a certain level of responsibility for your company’s debts in the event they cannot be paid back by the business itself.
From a lender’s perspective, this agreement makes a loan deal more secure because responsibility for repayment falls to the borrowing company and the individual directors involved.
When should I enter into a personal guarantee?
A personal guarantee functions as a means of providing reassurance to your lenders or finance providers while allowing your business to access the funds it needs.
A director’s personal guarantee agreement can help with the following:
- Business bank loan applications
- Property leases
- Asset leasing agreements
- Invoice finance arrangements
- Trade supply deals
If you are thinking of taking out a business loan, a personal guarantee is usually one of the requirements you will need to consider.
There are several reasons why a director may provide personal guarantees in support of a property lease, a business loan, or a line of credit.
A personal guarantee is often signed so that operators can access credit or business overdraft facilities or take on debts they believe they can comfortably manage.
Typically, if you are prepared to offer these guarantees, it’s because you believe your lender will never need to call in their loans in a way that affects your personal assets.
However, this is not the case when personal guarantees have been given, and a company faces significant cash flow concerns or financial pressure.
If you are thinking of offering a personal guarantee on a business loan, please consider the implications beforehand.
At this stage, it’s highly advisable to take expert advice before proceeding, as this guarantee could mean you end up in personal debt. So contact the Future Strategy team today and find out how we can help.
Are there different types of personal guarantees?
Essentially, there are two types of directors’ personal guarantees: limited and unlimited.
A limited guarantee will allow your lender only to collect a certain amount of money or a certain percentage of the outstanding balance from you, should you enter into an agreement.
These guarantees are usually more common when multiple directors can pay a certain portion of the debt.
For example, if your business defaults on its loan, your lender could ask each director for 25 percent of that balance.
You will be liable for the full outstanding balance if you enter into an unlimited guarantee agreement.
That means if your limited company cannot fulfill its obligations on a loan with a personal guarantee, your lender can request the full balance from you.
If there are not enough liquid assets available, your lender may seize other assets such as property or vehicles.
What are the advantages?
Signing a personal guarantee can open potential routes to finance that may not otherwise be available to you.
The main advantage of a personal guarantee is that it is likely to increase your chances of being approved for a business loan.
It also tells the bank that you are willing to put your personal assets on the line for your business.
What are the disadvantages?
As effective as your business plan might be, unforeseen circumstances (such as the coronavirus pandemic) are out of your control and can affect your ability to repay debts.
In the worst-case scenario, if you default on the loan and a claim is made under the guarantee, you and any other guarantors will be liable to pay your company’s debt. This subsequently may put all your personal assets on the line.
You may even find yourself facing bankruptcy if your personal assets do not cover the debt.
I’m thinking about entering into an agreement. What is my next step?
A director’s personal guarantee can become a source of real worry, particularly if you find yourself in a position where creditors call in their debts and assets are being seized.
As a director, having your personal finances and assets become part of the corporate insolvency picture can be a nightmare.
It’s crucial, therefore, that you know which options are available, even when the prospects of a favourable resolution may seem remote.
If you are thinking about signing a personal guarantee and are worried about any issues around entering into such an agreement, or you currently have a personal guarantee agreement in place, please get in touch with the Future Strategy team today.
Our initial consultation is FREE. Here we will assess the viability of the business and offer advice on appropriate strategies. We will also advise on the solution options available in relation to your specific situation and requirements. These solutions are wide-ranging, cost-effective, and flexible.