Also referred to as a ‘PG’, a personal guarantee is where you become personally liable for your business liabilities. The most common scenario is where your business borrows money and the lender asks for the director to provide a ‘Personal Guarantee’.
The rationale is simple, a limited company can be folded or wound up. Normally there are few assets left in the limited company by this stage and as such nothing for the lender to use to recover their debt. With a Personal Guarantee, the lender will look to what the company has, then come to you to ask for their money back.
A Personal Guarantee gives the lender more control, puts you more at risk and as such have more leverage over you to make sure they are repaid. There is no surprise that business loans where a Personal Guarantee is given are much less likely to default.
The Personal Guarantee Risk
There is always a reluctance to provide a PG. Why take more risk than is necessary? This is the most common quote we hear from lenders when a PG is resisted by a director;
If you won’t back your company then why should I?
I do get that argument, but it doesn’t make your personal risk any less. Normally you have accumulated something during your business life, so why risk everything unnecessarily?
The normal answer when situations of risk arise is to take insurance to mitigate against them. The unknown is that you can insure your PG risk.
Personal Guarantee Insurance
There are not many providers out there, it is new but it really makes some serious common sense to do this. A good accountant will normally be able to show the premiums as a business expense as the loan to which the PG is attached will have benefited the business.
The guarantee structure works something like this;
The basic model is that as time goes on then the amount covered by the insurance increases. You never get full 100% cover but bear in mind that many lenders will settle for a percentage of the PG paid in cash then you could still completely mitigate your risk.
Whichever way you look at it, mitigating your PG risk has to be a serious consideration.
The Big Unknown
It comes as a surprise so often when I explain that this sort of insurance is available. OK, you need to read the terms and make sure you have declared everything but that goes for any insurance these days.
If you are asked for a Personal Guarantee, or are looking to borrow for your business then this is a definite subject to look at.
If you want to know more then give me a call on 01293 541333 or email [email protected] and I will make sure someone talks you through it. For any general questions or comments then please use the comments box above or drop a line via the Lime Consultancy website.
By Dave Farmer