The financial press is full of horror stories about businesses running up so much debt that they are forced to shut down and the owners put into bankruptcy. And worryingly, according to research, over a third of SME owners don’t realise that they could lose their home, savings or other personal assets if they signed a personal guarantee in order to secure finance for their business.

If you are thinking about business finance that requires you to sign a personal guarantee, it is vital that you seek professional advice. You would also be wise to also take steps to mitigate against the risk of losing personal assets by looking for products such as Personal Guarantee Insurance.

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• What is a personal guarantee?
• What are the risks?
• Things to remember
• Cover yourself
• Get advice

What is a personal guarantee?

Buy in haste, repent at leisure is an appropriate aphorism here. Speedy access to finance can make or break your growing business. It can also make or break you, particularly if you find that you have to sign a personal guarantee to secure the funding you need.

Personal guarantees can apply to a wide range of finance resources including traditional loans, peer-to-peer loans or as part of an asset finance deal. Even if you secure a loan through a lender backed by the Enterprise Finance Guarantee it will be subject to a personal guarantee.

If you need finance that requires a personal guarantee, make sure that you educate yourself. A worrying number of SME business owners fail to realise that a personal guarantee will put their personal assets at risk.

So, what is a personal guarantee? A personal guarantee reassures a lender that if you default on a business loan, they can call on your personal assets to settle the debt and any interest accrued. By signing a personal guarantee, you are usually putting your home and savings on the line.

What are the risks?

It’s always a risk taking out new finance. When a you sign a Personal Guarantee for a business loan, the stakes increase considerably.

A Personal Guarantee puts your personal assets such as your home and savings on the line to settle a debt if you default on the loan. As a Personal Guarantee-backed loan may be the only route to new finance for some businesses, it’s easy to see how SME owners could feel stuck between a rock and a hard place. For many small businesses, signing a personal guarantee is the only way to access new finance. If you are willing to accept the risk, it increases your finance options and gives you access to the cash you need.

Remember, if your loan is called in under terms of the guarantee, you and any other guarantors will be liable to pay the business’ debt. As a consequence, you could lose your home, your bank account could be frozen, and your savings taken in settlement of the outstanding debt. If your personal assets don’t cover the debt you may be declared bankrupt. This would have an adverse effect on your credit rating. You could also be barred from acting as a company director, unless you gain court permission.

You can have more than one personal guarantee at a time, even If you’ve signed one on an existing business loan. But you need to bear in mind that they are cumulative so you could be doubling the risk to your personal assets.

Things to remember

Make sure you understand clearly where your responsibilities for the guarantee begin and end and get your lender to spell them out. Find out if the guarantee is loan-specific or whether it covers all future loans that the lender may provide.

Negotiate with your lender for a time limit for the guarantee and a cap on the amount. You need to remember that interest and costs will be added to the debt and these can soon quickly accumulate.

Also remember to protect your personal assets as much as possible by asking the lender to seek settlement from the company’s assets before enforcing the guarantee.

Make sure you confirm all the points of your agreement with the lender in writing – vital if you later try to negotiate your way out of the personal guarantee. You could try this if prejudicial material alterations to the guarantee have been made after you signed it, if key facts were not disclosed at the time of signing the guarantee, or if you were subject to undue influence in signing the guarantee (mis-selling).

Cover yourself with Personal Guarantee Insurance (PGI)

Personal guarantee insurance (PGI) can insure you against the risk of a personal guarantee being called in, keeping your personal assets safe.

This type of insurance will offset any outstanding obligations called in under the personal guarantee. The level of cover is based on a fixed percentage of the personal guarantee you wish to insure and is dependent on whether the corresponding finance facility is secured or unsecured.

Your annual premium is calculated on individual circumstances. Cover starts from 60% of the guarantee total in year 1, rising to 70% in year 2 and then up to 80% from year 3 onwards.

Happily, more than one director within a company can be covered under one premium as part of a Joint and Several Guarantee. In fact, PGI works when directors have different levels of shares in the company and/or varying levels of personal wealth.

Get advice

If your personal guarantee is called upon, it will involve significant costs for you, so if you’re considering a Personal Guarantee to give your business a cash boost, make sure that you seek sound financial advice and fully understand the risks involved. A finance broker is a good place to start or you might want to discuss options with your accountant or solicitor.

Signing a Personal Guarantee is a big step but when armed with all the facts and the protection afforded by insurance, it’s a step businesses may feel more comfortable taking.