The FCA's July discussion paper invites us to share our opinion on the ‘duty of care’ we owe our clients. Its asks for interested parties to consider:
Isn’t that a comforting phrase? We often use it when we are in the midst of troubling times or perhaps to explain some news that wasn’t quite what we were hoping for. I have heard many students this week use the phrase, it seems to put disappointing exam results in a context that is somehow part of some bigger picture ...
It’s not just students who use this phrase to excuse ‘today’ as if whatever has just happened is an important part of some bigger plan. It’s used if we want to try and comfort someone trying to cope with a problem or to excuse a position we wish we hadn’t got ourselves into.
There’s no let-up in lender demand for personal guarantees as security for small business loans. So faced with this Hobson’s choice and a future that’s predictably uncertain, what are the pros and cons of signing that guarantee?
As a company Director one benefit of your company’s limited liability status is that your personal assets are normally protected from any claim the company creditors may have against the company. This protection does not exist for sole traders or partnerships.
Your personal assets are yours and the company creditors have no claim against you, just the company.
So why would you ever give up that protection?
When considering your business finance options as a company Director, you might be asked to provide a personal guarantee as an assurance for a business loan or another source of financing on credit. This puts you into a direct relationship with the lender, who could legitimately pursue you personally if your company becomes insolvent. But is this a risk that you think is worth taking?
Most small business owners would prefer not to sign a personal guarantee, but when it makes the difference between securing finance and having the door shut in your face what’s a small business owner to do?
If signing the guarantee is the only route to finance, the first priority for any savvy small business owner is a thorough check on what they’re potentially getting into. Even a thriving business can go through uncertain times and if things do go wrong, that guarantee could mean loss of personal assets including home, possible bankruptcy, tarnished credit rating and damaged future career, not to mention a severe strain on family relationships.
What is a personal guarantee and do lenders actually call them in?
A personal guarantee is a contract between a creditor, usually a lender, and an individual, normally a director or shareholder of a company.
After building a business over many years it could just take six weeks to lose the lot if you have signed a Personal Guarantee.
Enforcing a Personal Guarantee or Bankruptcy ...?
If a bank or financial lender has obtained your Personal Guarantee in support of a business loan they will look to enforce that guarantee against you if your company fails to make payment. Rather than simply commencing a monetary claim against the Personal Guarantor, it may be more cost effective for the lender to commence bankruptcy proceedings against the Guarantor.
Bankruptcy proceedings are only appropriate if the debt is admitted, or not capable of being disputed in any way. If the debt is greater than £750 a lender can issue a bankruptcy petition against the Personal Guarantor.
Stealing probably isn't the best option but when seeking funding for your business, be sure that no one steals from you. Get the best deal for your business by knowing what you want and what is available.
Running you own business can be intensely satisfying, rewarding and frustrating at the same time. What I want as a director/owner is to be able to take advantage of opportunities as they arise. Opportunities wear many masks and require different tools to unlock their potential. I have probably been in the same position as you will have been. I know I am likely to be in the same positions again.
Topics: #commercial finance