For many business owners and directors, signing a personal guarantee can feel like a necessary step to secure funding, leases, or supplier credit. But while it may help your company move forward, it’s essential to understand that this decision can expose you to serious personal financial risk. In this article, we’ll explore what personal guarantees are, why they’re commonly requested, and the full scope of risks involved, along with the potential ways you can limit the risk involved.
What Is a Personal Guarantee?
A personal guarantee is a legal commitment made by an individual, usually a company director or shareholder, to repay a business debt if the company cannot. It can be common practice for company directors and is used in a variety of sectors. This means that if your business defaults, the lender or supplier can pursue your personal assets, used to cover the loan, to recover what they’re owed. These guarantees are often required when a business lacks a strong credit history or sufficient assets to secure a loan.
Limited company directors are protected by limited liability, which means their personal finances are separate to their limited company. In the majority of circumstances, this means that a director won’t be responsible for company debt. However, if a personal guarantee is signed, this bypasses limited liability.
The Main Risks
• Personal financial liability
By signing a personal guarantee, you accept responsibility for the company’s debt. If the business struggles or fails, your own savings, property, and other assets could be at risk.
• No limit to what you might owe
Many guarantees are not limited to a specific amount. You could end up liable for the full debt, including interest and legal costs, which can be financially overwhelming.
• Damage to your credit rating
If you’re forced to repay company debts personally, your credit score may be affected. This could make it harder to borrow money in the future, both for personal and business purposes.
• Legal consequences
Creditors may take legal action to enforce the guarantee. This could lead to court proceedings, asset repossession, or deductions from your income.
• Ongoing liability
Unless the guarantee is formally cancelled, you may still be liable even after leaving the company. This can be a long-term risk that’s easy to overlook.
How to Reduce the Risk
Before signing a personal guarantee, consider the following:
• Ask for a limit on the amount you’re guaranteeing.
• Request a time limit on how long the guarantee lasts.
• Avoid joint and several liability if possible, which makes you responsible for the full debt even if others are also guarantors.
• Get independent legal advice to fully understand what you’re agreeing to.
• Keep a close eye on your company’s financial health so you’re not caught off guard.
Summary
Personal guarantees can be useful for helping your business grow, but they come with serious personal risks. Make sure you understand what you’re signing and take steps to protect yourself. If you’re unsure, speak to a solicitor or financial adviser before making any commitments.