When surveying your business funding options as a Director, there may be a consideration of offering a personal guarantee as a security for business loans or another source of credit. This places you into a direct contractual agreement with the lender, who could look to you personally if your business becomes insolvent. But is it a risk worth taking?
It can certainly be an easy option. When there is financial security and business is good, it can be the difference in attaining business finance to expand that could in other terms be denied. And a personal guarantee is no longer uncommon by any means.
But before you decide on becoming a personal guarantor, you should at least know the basics of the legally binding contractual relationship you’re entering, and the pros and cons of that guarantee being actioned.
What is a Personal Gurantee?
When you sign a personal guarantee to a third-party creditor, usually a bank or another business lender, you’re confirming that you will act as guarantor for the debt obligations of that third-party, for example your company. This means that if your company does not make a payment (commonly known as default) on a loan repayment, you’ve guaranteed that you will pay instead.
Your commitment is secondary to the primary one between the borrowing party and the lender, so should your company not have any payments due then you can’t be found in a position of liability.
There are two simple features of a personal guarantee to keep in mind:
First, a personal guarantee should not be an indemnity; which is actually a primary obligation to pay further damages to reflect any loss suffered by a lender and it’s not reliant on the obligations of the borrowing party. When looking at the detail of any contract that suggests it’s to be a guarantee, it is imperative to identify if you will an indemnifier, a guarantor, or combination.
Second, the personal guarantee you give may or may not require additional security, which could be a charge over your residential home, and would make it easier for a creditor to seek enforcement in the event of borrower default.
What’s the alternative?
In simple terms, there isn’t much of an alternative, typically any form of business loan that asks for no security will be costly or even be refused. For cost effective and successful applications, a personal guarantee or security of a business asset will be requested. However, here at Finance for Entrepreneurs, we now have access to an insurance provider for Personal Gurantee Insurance.
What’s Personal Guarantee Insurance?
Interestingly not many clients know about it and not many insurers provide it, but our new relationship with Purbeck Insurance makes this possible.
“Personal Guarantee Insurance is a policy to cover losses arising on the final settlement made to a Lender under a Personal Guarantee agreement following the conclusion of an Insolvency Procedure”
So what’s insured, well; if your Company becomes insolvent, and you have entered into a personal guarantee for your company when taking out a loan,
Purbeck Insurance will pay the lender:
- the sum of the personal guarantee demanded by them up to the limits shown in your policy schedule
- less your contribution towards the sum insured and any amount you owe the company (provided this has been declared to and accepted by us)
- We will provide a support desk providing advice and assistance in the event of a precautionary or primary notification under the policy (details of what these are can be found within your policy documentation)
So if you have provided a personal guarantee for your company or a personal guarantee is hindering your decision, then get a quote and obtain your peace of mind.