What Is a Personal Guarantee?
For new or smaller businesses needing to secure outside financing, a personal guarantee is often the answer.
A personal guarantee is a type of security which promises lenders that the director will personally repay them should the business fail. This means that loans secured by personal guarantee are exempt from the usual protections of corporate limited liability. This can have serious consequences if directors cannot afford to repay.
So why might you get a personal guarantee? Can you get out of a personal guarantee? And what options do you have if your business fails?
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Why Might I Get a Personal Guarantee?
For some businesses, a personal guarantee is an attractive option when trying to secure external funds; the lender may be otherwise reluctant to provide the loan or they may be insisting upon a high interest rate.
A personal guarantee offers an extra layer of protection, which can allow directors to secure loans they otherwise would be unable to, usually at more competitive rates.
Directors may provide personal guarantees on:
- Bank loans
- Invoice financing
- Property leases
- Trade supply deals
- Asset leases
Typically directors will take on personal guarantees from a place of confidence. The business is doing fine, and providing this extra security will make the loan more competitive, so why not?
In cases where the business can repay the loan, the move can be highly advantageous. However, if the business takes an unexpected downturn, the director can be left seriously exposed.
Can I Get Out of a Personal Guarantee?
If your company has folded, and the personal guarantee has been triggered, there’s no way to escape the liability. However, you can remove a personal guarantee from a loan which hasn’t been defaulted on.
To remove a personal guarantee security from a loan, you must enter into a negotiation with your creditors. If you’ve been making consistent payments in full, and have reduced the amount significantly, lenders might agree to forego the personal guarantee.
If the lender won’t agree to get rid of the personal guarantee, you could get a new loan without a personal guarantee to pay it off, effectively switching creditors. Be careful though – if your business is approaching insolvency and you are seen to be making preferential payments, you could find yourself facing accusations of misfeasance or wrongful trading.
I Can’t Pay My Personal Guarantee - What Now?
If you’re unable to pay your personal guarantee, you’re left with a few options. If the business is insolvent but not yet liquidated, you could enter into a CVA. If the business is closed and you’re struggling with repayment, you may need to consider entering into an IVA or declaring bankruptcy.
Company Voluntary Arrangement (CVA)
If your business has just entered into insolvency – and you’re worried about outstanding loans secured by a personal guarantee – a Company Voluntary Arrangement could be the solution for you.
It functions as a repayment plan, allowing your business to continue as normal so long as it meets its agreed-upon monthly instalments:
- Freezes debts
- Renegotiates debts to a manageable level
- Protects the company from creditor action
You’ll need to gain the backing of 75% your creditors (by value). The earlier you make the proposal, the better. If successful, the CVA will allow you to pay off your debts before the personal guarantee is ever triggered.
Bankruptcy
If you’re unable to repay the liabilities of a personal guarantee, you may need to declare bankruptcy. Declaring bankruptcy will require you to surrender your valuable personal assets, but can soon see you back to a debt-free life:
- Writes off debts after 12 months
- Creditors won’t be able to contact you or pursue legal action
- Will be able to own property again after 12 months
Bankruptcy is a serious decision to take. Although it’s a last resort, it can provide a speedier and cheaper route than other insolvency procedures.
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement serves as an alternative to traditional bankruptcy. It’s a great option for those who are struggling with personal debt but don’t want to surrender their personal assets:
- Stretches out repayments, allowing for affordable instalments over 5-6 years
- Provides legal protection from creditors
- Protects your assets
- Debts are frozen
You’ll need the backing of 75% of your creditors (by value). So long as you make your monthly repayments, your assets will be protected. However, you may need to release some of the equity in your property.
Speak to an Expert Today
If you’re struggling with a personal guarantee you can’t afford, or a business lingering on the brink of closure, it’s best to get in touch with an insolvency practitioner as soon as possible.
Our team can assess your situation and guide you to the best possible solution. The earlier action is taken, the broader your range of options. Inaction can allow debts to spiral past a point of recovery, greatly limiting what you can do.
Get in touch to arrange a free consultation today.
FAQs
You can work out a liability cap with your lender prior to entering into the agreement, although not all creditors will be willing to incorporate such a cap. It’s a good idea to consult a solicitor to make sure you know exactly where you stand in terms of any liability.
This depends on the terms of the terms of the agreement. A personal guarantee may only last for an allotted period of time – if the business fails after this agreed-upon time, the guarantee will not apply.
You can take out insurance on your personal guarantee, which will cover a portion of your liabilities if the guarantee is triggered. The insurance will never cover the entire amount, but can significantly reduce your exposure should the worst happen. The policy’s cost will depend on the size of the liability.
This is where several individuals take on a personal guarantee for a business loan – however, this doesn’t mean the debt is equally split between them. It means that each of the borrowers is equally responsible. If one borrower is unable to pay, the other can be pursued for the full amount owed.
