A personal guarantee is a guarantee by an individual, to cover, backup or indemnify something done by a corporate entity. For example a director guaranteeing to pay back a debt of the company if the company isn't able to.
Personally guaranteeing debts can be risky, but it can provide benefits. It shows investors/lenders that you are more confident and willing to pay back the debt and use it for a fair, legitimate reason. This brings trust and can even be the final line between getting a loan or not; i.e. if a financially struggling organisation requests a debt from a lender without a personal guarantee, the lender may be more reluctant to lend, especially to the full amounts required, due to threat of them not getting their money back. This compares to if a personal guarantee was used, where the chances of getting back the money are improved if the person has assets.
Can I get out of a personal guarantee?
Unfortunately, no. However, there are steps you can take;
Take Out Personal Guarantee Insurance
Personal Guarantee Insurance (PGI) is a relatively new phenomenon. It exists to protect the guarantors’ assets, when they are at risk from a liquidating company.
When the lender seeks personal assets to be used to repay the loan balance, after the company liquidates, having PGI covers some of the liability. The value depends on the insurance coverage taken out, but usually is worth up to 70% of the insurers' net liability. Generally speaking these insurances are expensive. Why? Because if you are asking for insurance you are already hinting that perhaps the guarantee is not that solid!
Renegotiating The Contract Upon Which the Personal Guarantee Is Attached
When using the personal guarantee, set limits with the investor, so you can restrict your consequences. Ensure you read all small print before signing!
Ask for a short time period for the guarantee, rather than signing ‘forever and unconditionally’. Why not ask for the guarantee to only apply to a certain amount of time of the payback period?
Request for only a percentage of the funds to be paid in this way. If a company owes £30,000, and you personally guarantee the full amount, you will have to pay back the full extent of this on their behalf (if they are unable to pay back themselves). Only personally guaranteeing 40%, for example, would mean in the case of the company being unable to pay back the debt, you would only have to pay back £12,000 of this.
Carefully select the items which can be seized – do not risk everything.
Negotiating such contracts may be difficult, but you never know unless you try
At Company Rescue, we can help you to negotiate terms and deal with any other personal guarantee issues. Call us today on 0800 970 0539 for advice.
Go into an Individual Voluntary Arrangement (IVA)
This is quite common where the personal guarantee has been called in. It may be possible to pay off the debt over a longer period of time using an IVA. An IVA can spread the cost over 3-5 years and even write some of the debt off. Usually the lender will want to see at least 40p in the £1 paid back. An IVA is overseen by an insolvency practitioner who collects the money on the creditors behalf. The downside of this is that it will be hard to obtain any credit as your personal credit score will be very poor. You will also need to raise money from any equity in your house in the last year or so of the IVA as a standard contribution to the IVA.
WORST CASE SCENARIO and only after trying/assessing all other options!
When you go bankrupt, your liability for all debts is discharged. Note: this is only for personal bankruptcy, Companies that become insolvent via liquidation or administration do not eliminate personal guarantees.
One final thing. Remember that if you are trading in a business as a soletrader rather than limited you are personally responsible for all the debts of the business. The business debts are your debts. Bankruptcy will be the only way to discharge any of these. Get limited!