A personal guarantee, sometimes referred to as a director guarantee, is an agreement that is made by the director of a limited company when taking out finance or a loan for their business. In this agreement, the company director assumes personal liability for the debt should the business be unable to make the necessary repayments.
What are the benefits of a personal guarantee?
Agreeing to sign a personal guarantee demonstrates to lenders that the company director is confident in their financial forecasts and believes in the long-term resilience of their business. It can not only help them to secure more funds than would otherwise be possible but also lenders will often be more inclined to extend credit to them in the future should it be required.
What are the drawbacks of a personal guarantee?
Should the business be unable to make the loan or finance repayments, the company’s director may have to liquidate personal assets to repay the loan under the terms of the agreement. This means they may need to use personal or family savings, personal investments, or even sell their home to make the repayments. Accepting financial liability for a business can place a significant strain on the director and their family.
Should you sign a personal guarantee?
Personal guarantees are inherently risky; for this reason, you should always seek legal advice. Companies such as https://www.parachutelaw.co.uk/director-guarantee will provide you with independent legal advice for a fixed fee, advising you of the risks and helping you to consider all the possible outcomes.
If you are confident that the business is on an upward trajectory and have performed a full and transparent risk assessment that has not deterred you from this course of action and if there is no other way of securing the funds you need, signing a director’s guarantee can be a highly beneficial growth strategy.
However, if you have concerns about your ability to make the repayments or there are risk areas that are yet to be fully explored, you would be wise to bide your time and seek a less risky financing strategy; alternatively, you could take out personal guarantee indemnity insurance to reduce your personal liability
Only you will be able to make the final decision. By considering the implications and potential outcomes, you will enter into the agreement with your eyes wide open if you decide to go ahead.
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