For small business owners, there has never been easier access to finance nor a more diverse range of lenders. The Fintech revolution has resulted in multiple lending platforms, and a lower barrier to entry due to increasingly sophisticated risk algorithms.
But while access to finance is largely a good thing for business, it does come with risk. For many directors, the signing of an all-important business loan document is tempered by the concern of having to offer a personal guarantee.
This article will explore just what this means and what the risks are.
What is a Personal Guarantee?
All lenders require security of one form or another to ensure they are going to get their money back. When a business is starting out, it may not have the assets or collateral to guarantee a loan itself. In this situation, banks will ask for a company member – usually a director – to guarantee the loan with a personal asset.
This is known as a personal guarantee document and it explicitly breaches the corporate veil keeping personal and business finances apart.
What are the Risks of Signing it?
For directors of a startup, it may be nearly impossible to envisage the business failing, or a time when the optimistic rush of a new venture reaches the stale reality of a business that has reached the end of its natural life. But these things can and do happen and, with a personal guarantee in place are that much more serious and stressful.
For directors of a limited company, the end of a business means tremendous stress, and the need to find new employment, but all of this is severely mediated by the limited company structure. Assuming no wrongdoing has taken place, the company debts are liquidated and then left behind.
But where a personal guarantee is signed, all of this can take on a much more significant aspect. Many directors who have put up family houses as collateral end up having to sell their residence as part of the business failure, bringing with a much more serious impact.
What the best Ways to Protect Yourself if Signing the Guarantee is Essential?
There are several ways to limit the risk from personal guarantees.
One of those is to sign them severally (with other) or jointly and severally. This last option means all parties assume responsibility up to the full amount, should other parties abscond.
Either of these options mean you have a limited risk and hence less to lose should the business reach insolvency.
The second way is to consider investing in personal guarantee insurance via some one like PGexpert.
Personal Guarantee Insurance can be paid for by the business and, with a simple annual premium, brings with it tremendous peace of mind.
What About Bounce Back Loans?
The good thing about the government backed Bounce Back Loans is that they do not require personal guarantees. This was one of the key criteria stipulated by the government to make the process less stressful for directors.
Insolvency a with a bounce back, therefore, is an easier process because it doesn’t implicate personal assets such as a family home.