If you have a Business and you want too borrow money, you will probably be asked to give a Personal or Directors Guarantee.
Most Directors don’t want to give guarantees as it makes them liable rather than their business and the purpose of having a limited company was to limit their personal liability.
So it’s a common dilemma.
What can you do to reduce your risk?
- Would you be prepared to pay a higher rate of interest? there are are lenders who for an increased rate will agree not to ask for PG’s or DG’s
- If you aren’t prepared to give a guarantee you should make this clear upfront with the potential lender, it will save time and money.
- Limit the terms of the Guarantee – don’t let the guarantee be unlimited or unconditional
- Agree terms for relief – for example when a % of the debt has been repaid
- Decrease the Guarantee if the business achieves specific goals, for example a target net worth
- Set rules for when the Guarantee can be called on for example when a set number of repayments are missed
- Avoid ‘Joint ans Several’ Guarantees as not all business owners may have equal shares
- Avoid co-signing by Spouses
- Avoid using your main residence in the guarantee
- Consider whether Personal Guarantee Insurance could be obtained and used
What are the benefits of Personal Guarantee Insurance in more detail?
It allows directors to balance their risk evenly, so that no one director is taking on all the uncertainty of guarantees being called upon in the future
It can provide the incentive needed to grow the company by borrowing essential monies
This type of insurance is flexible, and can be increased if necessary as your business grows
Personal Guarantee Insurance provides peace of mind to directors that the full value of their personal asset is not at risk
Start-up companies have access to funding that they might not otherwise be comfortable taking on