- Purbeck Insurance Services, the UK’s only provider of Personal Guarantee Insurance offers tips on the facts to check when raising finance through a personal guarantee backed loan.
Additional funding can help businesses scale up, aid cash flow and may help to offset downturns in trade or disruption within the supply chain, however additional funding usually comes at a price.
In the case of commercial loans, it’s not just a signature required on the line; many loans require a personal guarantee, putting personal assets on the line too.
A recent survey we carried amongst SMEs[i] revealed that there is a lot of misunderstanding surrounding personal guarantees. Just over 60 per cent of respondents didn’t realise the bank will be able to repossess the personal assets of business owners or directors if the loan is called in for payment.
Personal guarantees give the lender a written promise, made by a director or number of directors, to accept liability for a company’s debt. In practice, this means that if the business defaults on a loan (or lease) the director’s home, car and anything in their personal bank account may be at risk.
A spouse or partner often has to sign the guarantee if they co-own the family home, and most guarantee forms require joint and several liability. This means each individual who signs a guarantee can be liable for the whole amount of the loan.
It’s therefore vital you seek sound financial advice and fully understand the risks involved before making such an important commitment. Also research ways you can mitigate the risk such as taking out personal guarantee insurance. Lenders really do call in guarantees and directors maybe placing all of their assets at risk, including their home if things don’t go according to plan.
How will the lender enforce the guarantee?
There are several options open to creditors to enforce the guarantee; one frequently used is for the creditor to apply for a County Court/High Court Judgement. They can either get a Warrant of Execution and get the bailiffs in, or they go for a Charging Order to secure the debt against your home.
Can the lender serve notice or seek payment on demand?
Depending on the creditor and the amount being called on, the usual route is for the creditor is to issue a Statutory Demand and give you 21 days to either settle the debt or reach an agreement to pay. However creditors are more or less generous with their payment terms, and can seek payment on demand.
What exactly constitutes a default?
In your mind you might be just 24 hours late, but some loan providers will see this as a default and take steps accordingly to recoup the debt.
Do the terms allow for any remedy period upon default?
Some creditors do allow a specified timeframe for you to pay back the default – others don’t.
How will your net personal assets be assessed prior to the giving of the guarantee, and is this is likely to change?
Many providers of personal guarantee loans ask for a personal financial statement. The format is standard and shows assets on the left and liabilities on the right. Others may require more proof of the value of your assets.
Does the contract state the lender must exhaust every other avenue before making demands on you?
Some lenders are prepared to look elsewhere, such as to business assets before calling in the debt.
Have you considered the cost of obtaining personal guarantee insurance?
Personal Guarantee insurance will mitigate against the risk that the Guarantee is called by a lender. It will offset any outstanding obligations called in under a Personal Guarantee.
[i] 500 SMEs surveyed by Censuswide – March 2019