What does a personal guarantee cover?
What does a personal guarantee cover?
Personal Guarantees have been around for years and their use are growing in this ever-changing economic environment. One thing that genuinely surprises many people is that a personal guarantee not only covers the current loan but also covers future borrowing. This means that in addition to covering the existing credit amount, the guarantor is often covering all the existing debt incurred prior to them signing the guarantee and any future credit that may not have even been contemplated. This might also include any refinancing done later or specific debts like credit cards, car loans or an overdraft. This applies both to business borrowing and mortgage finance.
Personal guarantees being used to secure additional or increased funding can certainly be an attractive option. In times of financial security when business is good, it can be a means of attaining business finance to expand that might otherwise be denied. And the personal guarantee is not uncommon by any means of supporting a business loan, property lease or a line of credit.
However, it is not only your current circumstances that you have to weigh up but the future circumstances.
Are there any hidden surprises with PG’s?
There can be any number of reasons why a company director might be willing to provide personal guarantees in support of a business loan, property lease or line of credit
A personal guarantee should not be an indemnity. It is important to recognise if you will be acting as an indemnifier, a guarantor, or a mixture of the two. There is also the option of personal guarantee insurance to think about also however, this can be expensive.
Also, it is worth noting that the creditor doesn’t have to pursue the borrower first unless the contract expressly states that they must. They can go after whoever has the deepest pockets and that might just be you. This is regardless of whether the borrower is solvent is irrelevant.
Some points to review before becoming a guarantor
- How much risk is involved?
- Is the guarantee limited to a maximum amount?
- Know how to get out
- Get regular updates
- Negotiate on the terms
- If in doubt, get advice
- How will it be enforced
- What constitutes a default
- Net assets assessed prior to the giving of the guarantee and is this likely to change
Due diligence is also advised for the supplier
Not only are there risks for the director or owner signing the personal guarantee, but there are also risks for the initial supplying company who are providing the credit, product or services. If the company receiving the goods and services fail to pay and the personal guarantee defaults, then they will also be left out of pocket. Therefore, when asking for any personal guarantees or issuing a line of credit based on this then you must work through these key points.
- Must keep your records update – see what original PG covered
- Assets – keep up to date information on creditworthiness of company and directors
- Keep the PG guarantor update – ensure they know if credit has been extended
- Out with credit terms – include PG in any seriously overdue
- Look to review the structure of the business and of you require to add additional directors
- Ensure the person is still employed or associated with the business
- Your agreement should include a remedy period
- Should include conditionality of the Personal Guarantee to make thing clear for both parties
- Personal Guarantor has sufficient assets to discharge his debt
- It is in the interest of both parties to also agree on a liabilities cap prior to signing a personal guarantee
Given the current economic climate and the effect of COVID-19 we have already seen expect a sharp increase in the number of personal guarantees being signed. However, this step should not be taken likely. If you are thinking about providing personal guarantees on a business finance facility, then please ensure you have explored all other available options. If you can raise the funds your company needs without personal guarantees, then that will generally be a far preferable option from your perspective as an individual.
If you do decide on signing a personal guarantee, then demand clarity on the issue of exactly where their responsibilities for you begin and more importantly where they end and make sure you know how much it covers and your full liability. You may also want to build in an annual review to ensure you are aware of how much the document and your liability has changed over.
We come across personal guarantees every day in our line of work and often the people who sign them do not fully realise their liability. What is even more apparent is they don’t know who or what it has been used for until it is too late. If you need any advice on how personal guarantees work or how to enforce them please contact our recoveries team on 01698 821468 or email [email protected].