Personal Debt

Personal Guarantees

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Hundreds of thousands of small business owners have provided Personal Guarantees

Personal Guarantee Risk to Directors

In mid-April 2020 Purbeck Insurance Services, who provide personal guarantee insurance, estimated that over 420,000 small business owners have provided personal guarantees for business loans. However, Purbeck consider the estimate conservative and the true figure could be as high as 560,000.

There is therefore a real risk of significant consequences for many business owners and directors who have granted personal guarantees to secure business finance, should the business default on the funding facility. In the current climate, this is particularly concerning due to the impact which the Coronavirus / COVID-19 will have on thousands of small and medium businesses and their ability to continue to honour their financial commitments.

CBILS Funding & Personal Guarantees

There is plenty of information in the public domain regarding the criteria for Coronavirus Business Interruption Loan Scheme (CBILS) loan applications. 

Such criteria includes the business to be a viable lending prospect if it wasn’t for the coronavirus, solid financial reporting and forecasting information which shows the business can afford to meet its existing obligations/debts plus repay the CBILS loan if granted, as well as documented reasoning for the value applied for and what the loan is intended to be used for.

We understand that CBILS is not a facility which directors and business owners are able to use to convert personally guaranteed business loans and finance facilitates into an unsecured CBILS facility of up to £250k.

Directors and business owners therefore should properly consider the effects on the business if it is straddled with further debt, in particular, will this additional debt impact on the company’s ability to continue to honour personally guaranteed funding facilities and can the business meet its existing and new financial commitments moving forwards.

With a solid business plan and financial modelling, directors and business owners can make well informed decisions as to whether further finance is required, what amount is needed and if it is affordable.

As a firm specialising in Business Recovery and Insolvency, we would also encourage business owners and directors to seek specialist advice from a licensed and regulated insolvency practitioner to discuss statutory and non-statutory solutions before committing to any additional funding facilities (whether or not they’re personally guaranteed).

At ICS, our licensed and regulated professionals have over 40 years combined experience advising small and medium businesses in financial difficulty.

Common Questions

Below are a number of common questions we are often asked by concerned directors and business owners who have granted personal guarantees for company debts. If you are worried about your personal guarantee exposure, please don’t hesitate to get in touch with us by either emailing or calling us on 0800 731 2466, all initial advice is free of charge and in confidence.

Essentially, any valid and enforceable personal guarantee for a company debt means that the debt is your responsibility as well as the company’s. There are usually conditions of a personal guarantee which means the lender doesn’t need to wait for payment from the company and can directly enforce against you at any time.

What then happens depends on your personal asset position and your ability to settle the debt. If you cannot pay, personal enforcement action will be likely, which may result in your bankruptcy or having to consider an Individual Voluntary Arrangement (IVA). Click the IVA link for more information.

If you are able to demonstrate that by calling in the personal guarantee and taking enforcement action this will provide a lesser return on the debt than another solution, then this is often taken into consideration. For example, if enforcement action would result in your bankruptcy, prevent you from being a director of your company and give a minimal return to creditors, compared to a say a Company Voluntary Arrangement (CVA) for the business which would result in a greater rate of return, then creditors would consider the pro’s, con’s and risk of pursuing you personally. See Company voluntary Arrangements (CVA’s) for more information on CVAs.

If amounts remain outstanding by the business and you have personally guaranteed the debt, then this will result in you being personally pursued for payment.

Yes, if you feel that the guarantee may be invalid or unenforceable for whatever reason or there are mitigating factors. If a personal guarantee has been called in, we would always encourage you to seek legal advice to properly understand the implications. We work with a number of specialist solicitors who are experts in this field.

Of course. Your personal financial position will have a bearing on what negotiations can take place and any settlement reached with the creditor. This can either be in the form of an agreement outside of a formal statutory insolvency process or as part of a structured Individual Voluntary Arrangement (IVA). It is important in negotiations to strike a balance and any offer for payment can be submitted based on a saving in legal fees if the creditor had to enforce the debt through the courts and into bankruptcy.

Our licensed and regulated insolvency practitioners have over 40 years combined experience in advising businesses and individuals in financial difficulty. We are ideally placed to work with you and provide professional advice for dealing with your situation. All initial advice is free of charge and in the strictest of confidence.

You will have had to agree to being personally liable for the debt. This will typically be in the form of either a personal guarantee document, within the terms of a funding facility contract or included within agreed terms and conditions or account opening documents. Review all contractual information and we would always recommend seeking independent legal advice.

Often, when business owners and directors provide the personal security to lenders, this will be in the form of a personal guarantee and an indemnity. The inclusion of an indemnity essentially means that there is a primary obligation on the business owner / director for the debt (as oppose to a secondary obligation through a guarantee). Without getting into the nuances and intricacies, an indemnity puts the lender in a stronger position than just holding a guarantee. If you are unsure what terms you have granted to a lender/business creditor, it is recommended to take appropriate legal advice at the earliest possible juncture. We work with several solicitors who specialise in this.

Yes, you could end up having to cover the legal costs of any enforcement action which is needed to be taken against you to enforce the terms of the personal guarantee. It is therefore important to bear in mind whether it is worth challenging or being obstructive to the process if it is going to cost you more in the long run. Early advice is key to understanding your risk and how best to deal with the problem.

This list isn’t exhaustive however these are the typical personal guarantees we come across regularly.

  • Unsecured business loans
  • Other business loans including secured lending
  • Peer to Peer funding providers
  • Bank loans, overdrafts and some credit cards
  • Asset finance (plant, machinery, vehicles etc.)
  • Invoice finance and factoring facilities
  • Suppliers such as trade supplier accounts

Get in touch

We understand that when personal guarantees are called in, this is a stressful time for you and your family. As the consequences are personal, it is important that you seek early professional advice so that you fully understand the situation you’re in and have a strategy in place.

If you are concerned about personal guarantees you have given, or if you’re currently being threatened with recovery action under the terms of a personal guarantee, don’t delay getting the right advice.

Click the link below and fill in the form to get in touch or give our team a call on 0800 731 2466.

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