What is a director’s personal guarantee?
In business it is often necessary to take out funding in order to get your company off the ground or to embark on a growth or expansion project. Perhaps you need money for stock, to put down a deposit on business premises, or money to purchase a vehicle.
While taking out funding for your company is often a requirement, if your business is a start-up and therefore has no historical financial records, some banks may be unwilling to lend the money by way of a standard company loan. Instead you may be asked to sign what is known as a personal guarantee before the loan is granted.
What is a personal guarantee?
Essentially, a personal guarantee shifts the responsibility for servicing the debt away from your limited company and on to you as an individual. This means that if your business is unable to pay back the money borrowed, you will have to make arrangements to settle the loan using your own personal funds.
It is not just start-ups which may be asked to sign a personal guarantee. They are often requested for companies who have a poor track record of meeting their financial obligations, where the loan size is particularly large, or for companies operating in more niche industries.
Personal guarantees are favoured by banks as they provide the lender with an added level of security in case your business encounters financial difficulties further down the line. As long as your business continues to trade successfully and is able to keep up with the repayments of the loan in full and on time, signing a personal guarantee will not make any difference to you personally. It is only if your company fails to repay what is owed, or ceases to trade entirely, that the personal guarantee will come into effect.
What happens to a personal guarantee if my company enters liquidation?
Due to limited liability, a company entering liquidation will see the debts held in the company’s name written off, but any debts for which a personal guarantee has been signed will remain outstanding.
From this point onwards, the borrowing secured by the personal guarantee will be seen as yours, and treated as any other loan in your name would be. One of the problems of personal guarantees is that when the money is borrowed, the director envisages the payments being made from the company’s bank account and therefore repayments are not budgeted for this within their own personal finances.
Unfortunately, a failed business often goes hand in hand with personal financial problems. As business loans are typically for large amounts, the monthly payments are also significant. It therefore tends to be the case that once a personal guarantee crystalises and the company director becomes personally liable for the business debt, they struggle to make the repayments asked of them and the account falls into arrears.
What happens if you fall behind on a personally guaranteed loan?
Once you fall behind with the payments on a personally guaranteed loan, the situation can quickly get out of control as fees and interest are added onto the balance. It is therefore important that you take swift action if you find yourself in the situation of being unable to keep up with the repayments on a personally guaranteed business loan.
Our advisers are experienced in dealing with both personal and business debt problems in Northern Ireland, and will work alongside you to come to the best solution for your individual circumstances.
This could take the form of negotiating a payment plan with your creditors to prevent the company falling into liquidation, or a personal insolvency procedure such as an IVA or bankruptcy if the personal guarantee crystalises.
Every debt solution comes with its own positive and negative aspects, and it is vital that you understand both the long- and short-term implications of each option before you commit. Call our experienced professionals today.
