Personal Guarantees
The whole idea of having a limited company is that it is separate from the individual directors. However, personal guarantees blur the lines between the two
What is a Personal Guarantee?
A personal guarantee (PG) makes a company director personally liable for company borrowing if the business is unable to repay the money owed. Many lenders seek to have some certainty for the recovery of their debt, if the company can’t provide that as it doesn’t own assets sufficient to ensure repayment the finance company turns to the directors.
Unfortunately, a personal guarantee may be the only way in which a director can secure funding at a competitive rate.
As an entrepreneur you need to believe in your business. Therefore, as a director you may offer a personal guarantee in the belief that it will never be needed. Unfortunately, however, if the business later is unable to make the repayments, the director who provided the guarantee could find themselves personally responsible for the debt.
When will a personal guarantee “kick in”?
As soon as the company defaults on the debt the lender may start to write to the director seeking repayment.
What if I didn’t realise that I signed a personal guarantee?
If you do not have a copy of the loan documentation you can request a copy from the lender. If it is not clear that you entered into a personal guarantee you should seek help from a solicitor experienced in such matters. We can help you find one.
Can I show them that I can’t afford to repay it?
The lender will have the option to seek your bankruptcy if you do not repay the debt. Therefore, you must consider whether you have assets that could be sold to repay the debt. This could include your family home. even if it is jointly owned with someone else.
If another director also gave a PG are we each responsible for half the debt?
You need to check the terms of the loan and the PG. It is often the case that they will be “joint and several” which effectively means that you are each liable for the full amount until the debt is repaid.
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