Corporate Law expert, Chris Brightling examines the pros and cons.
Personal guarantees can help your business secure vital business finance that you might not otherwise be able to get.
Who might need a personal guarantee?
There are a number of scenarios where a lender or other third party may ask a director or business owner to personally guarantee a loan or financial arrangement in case the amounts being borrowed cannot be repaid by the business. Personal guarantees are required as a form of security in a wide range of funding scenarios from bank loans to asset finance arrangements and invoice finance facilities.
What are the risks?
The personal guarantee will declare that you are personally liable for the obligations of your business to a particular lender and may also make you liable for default interest, legal and other fees. Put simply, a personal guarantee places your personal assets at risk should the business default. In a worst case scenario, some or all of your personal assets, including the family home, can be sold or liquidated to repay the loan. Business owners can often be put under pressure to give personal guarantees to get their new business up and running or to secure funding for growth. Although they can be a necessary evil, it is important to take advice on the risks and implications of a personal guarantee before signing up to one.
When should you NOT sign a personal guarantee?
Anyone who does not have a stake in the business or who does not have a complete view of the company’s plans or finances should be very wary of signing up to any form of personal guarantee.
What if you sell the business?
In the event you sell your interest in a business, you need to make sure you get your personal guarantee released. If you are not properly released from the personal guarantee you may still be held liable if the business defaults in the future.
Why is legal advice important?
In a finance situation, lenders often insist that a guarantor takes independent legal advice to extinguish any future argument that the guarantor did not understand the terms or practical implications of entering into the personal guarantee. Taking legal advice is crucial even where it is not a lender requirement as even issues that may initially seem insignificant can become vitally important at a later date. There may also be areas that can be negotiated such as whether your liability under the guarantee can be capped at a lower amount.
For further advice on this and other Corporate & Commercial issues please contact Chris Brightling.
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