If you’re a company director then circumstances can arise in which you decide to offer personal guarantees in support of a loan application or your pursuit of a line of credit. Where these guarantees are given, a lender will take some reassurance that they could pursue a director personally for debt repayments in the event of the company becoming insolvent.
From the perspective of a director, this provision of personal assurances for company debts can seem like a decision worth taking if it makes the difference between attaining finance or being denied credit or financial flexibility. However, in a situation where a company is unable to maintain its debts and is approaching a position of serious financial distress, the issue of personal guarantees can become a cause for considerable concern for the directors involved.
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There are a broad variety of scenarios in which a lender might ask a company director to guarantee a loan or financial arrangement in case the amounts being borrowed cannot be settled by the relevant business.
Some of the most common include the following:
- Property leases
- Trade supply deals
- Asset leasing arrangements
- Invoice finance arrangements
- Business loans
Key considerations for directors
Among the most important areas of potential focus for directors as they consider providing a personal guarantee to one or more creditors should be the issue of capping liabilities. It is not always possible to reach an agreement with creditors on this issue but where there is scope to limit your financial responsibilities in this context it makes sense to establish contractual clarity on the subject.
More generally, a director providing personal guarantees should seek to establish clarity with regard to as many of the elements of a relevant agreement as possible. In doing so, the scope for disagreements and disputes at a later date can be limited. Even issues that might initially seem insignificant and unlikely to be of any real consequence can be worth the effort of clarifying because they can become vitally important in the context of a company insolvency scenario.
Negotiating with creditors about a personal guarantee
Negotiating out of obligations defined under the terms of a personal guarantee given by a company director is possible but rarely straightforward. Creditors will typically be inclined to retain the reassurance of a director’s personal guarantees for loans or financing once they have been given.
Scope for reducing a director’s liabilities under these circumstances is generally greater the healthier a company’s financial position is. So, if a director approaches negotiations on this subject as their company approaches insolvency then the likelihood of a favourable outcome are slim.
Whatever your company’s financial position might be though, negotiations around personal guarantees are best conducted as early on as realistically possible, regardless of whether or not your company is set to become insolvent. It can also help a great deal during any negotiation in these subjects to have written evidence and documents to refer to in support of any arguments being made. So, where possible, any requests you make or communications you send or receive as a director in relation to your personal guarantees should be set aside in writing in case they ever become crucially relevant in the context of a dispute with creditors.
Pros and cons of personal guarantees
Where they can make the difference between a company carrying on or shutting up shop, there is a clear motivation for directors to add their personal financial guarantees into the equation in support of business finance applications. So the basic ‘pro’ of personal guarantees is that they can give companies a new lease of life if they succeed in convincing a creditor to provide or free up finance.
On the other hand, the potential negative consequences of providing personal guarantees as a director should not be overlooked. The reality is that where a company becomes insolvent and personal guarantees have been given by directors in support of financial arrangements, creditor are likely to press for their debts to be settled by the individual or people involved.
It is easy and tempting to assume that insolvency and liquidation will never be a problem for your company if you’re a director and you have faith in the underlying value your business provides. But thousands of once-thriving companies end up in financial distress around the UK every year.
Furthermore, it is important for directors to realise that what might seem like hypothetical assurances given in support of a business finance application can in time become all-too real causes for financial concern on a personal level.
Personal guarantees are frequently an issue of particular concern under circumstances of corporate financial distress and it can make a real difference to how events unfold to have expert guidance to call upon.