Understanding your personal liabilities in relation to company debt

Understanding your personal liabilities in relation to company debt

As a Company Director, circumstances may arise where you find yourself in a position to offer a personal guarantee to support a line of credit. This may seem like a decision worth taking to enable your company to move forward and reach its true potential; however, this does not come without risk. In a situation where a company is unable to maintain its debts and is in a position of financial distress, a personal guarantee can often become a cause for concern for directors, and in the current climate, where the viability of businesses is a major worry, offering a personal guarantee has an increased risk.

What is a Personal Guarantee?

A personal guarantee is a promise made by an individual to personally pay back any amounts owing to a Lender should a company not be in a position to pay back the amounts borrowed. A personal guarantee provides a lender with extra security should a company default on its obligations.

There are a range of scenarios in which a credit provider may ask a Director to provide a personal guarantee.

Some of the most common include:

  • Business Loans
  • Invoice Financing Agreements
  • Mortgages
  • Leases
  • Hire Purchase and Operating Lease Arrangements
  • Trade Supplier Accounts

What benefits are there to signing a personal guarantee?

Securing credit

The most obvious benefit of providing a personal guarantee by a director is that it will improve a company’s chances of securing credit. Providing a personal guarantee may open up new lines of credit or may mean that a company is able to access a higher amount of funding.

New businesses

If you have recently started a new business you will have no recent trading history and may encounter difficulty in obtaining funding; this may be through obtaining loans and other facilities, or include opening Trade Supplier Accounts. By providing a personal guarantee, this may help you to secure credit for your company.

Risk vs. reward

The benefits of providing a personal guarantee do not however come without some risk. Continue reading “Understanding your personal liabilities in relation to company debt”