Beware of Personal Guarantees….
If you get a loan from a bank or private lender for your business, you will probably be asked to sign a personal guarantee. Many business owners are so relieved to get the loan that they don’t read the fine print that puts them at risk. You should. And, you should attempt to negotiate.
If there is more than one director then it is very likely that all will be required to sign, thus making the liability ‘joint and several’. This means each director will be liable for the full amount of the guarantee and not what they may consider to be their share. Guarantees are taken to ensure that directors cannot just walk away from a failed company but instead have a vested interest in making it work.
Should the company fail the lender will make formal demand, to each guarantor, for repayment for the full amount of the guarantee. Naturally a lender cannot recover more than they are actually owed and assuming all guarantors pay, then any surplus funds are returned.
To quote Steve Jones of SJL Finance “Bankers have always considered guarantees the easiest form of security to take but the most difficult to realise. Unsurprisingly guarantors will go to extraordinary lengths to try and avoid having to make payment. The actual wording for guarantee documents has evolved and developed over many years. As loop holes have been discovered so new clauses have been introduced which means that it is now very difficult for a guarantor to escape paying.”
Clearly even if the bank has other security the very real danger is that personal assets can be put at risk if a guarantor is required to pay up. This could easily result in pressure being brought to bear to dispose of personal property or other assets to satisfy the liability. Even if the lender is unable to force a sale of property because they do not have a legal charge they could nevertheless place a Charging Order on the property which means the liability would have to be cleared should the property be sold at some future date.
It is therefore essential that company directors fully understand the full implications of signing such a document and are strongly advised to seek professional advice from their lawyer. It is now possible to mitigate, at least partially, the liability by taking out a Directors Personal Guarantee Insurance Policy, a new type of insurance – please click here for further information provided by SJL Finance.
Remember that if you know the rules, bank lending and getting finance will be just that little bit easier. For more business updates and tax saving tips follow me on twitter @rjbradley.