What company directors should know before giving a personal guarantee 

For company directors, navigating the financial landscape of their business often involves making strategic decisions to secure funding and encourage growth. It is becoming increasingly common for company directors to take personal responsibility for the company’s financial obligations, often in the form of a personal guarantee. While personal guarantees can be crucial for accessing loans and credit, they are a big commitment and it’s essential to be well-informed and consider various factors before signing to ensure that you are making the right decision.

What is a personal guarantee?

A personal guarantee is a legally binding commitment that holds a company director personally responsible for the company’s financial obligations. This means that if the company is unable to meet its financial commitments, the director’s personal assets may be used to cover the outstanding debts. Personal guarantees are often required by lenders or creditors as a way to mitigate the risk associated with lending to a business, especially if the company has a limited credit history or faces financial uncertainties.

Consider the personal implications

The implications of personal guarantees are profound, involving personal assets and financial well-being. You should carefully weigh the potential risks before committing to a personal guarantee. While it may enhance the chances of securing financing, it also means that your personal assets, including property, savings, or investments, may be at risk in the event that the business fails.

Providing a personal guarantee can impact an individual’s personal credit rating. Directors should be aware that their personal financial history may be scrutinised by creditors, and any default on the personal guarantee will affect your credit rating.

Assess your company’s finances

Before providing a personal guarantee, you need to conduct a thorough assessment of the company’s financial health. Understanding the current financial status, cash flow projections, and potential risks can help directors make informed decisions about whether a personal guarantee is necessary and justifiable, or it is simply too risky.

Negotiating terms and limits

Terms and limits of personal guarantees are usually negotiable, so as a director you should engage in discussions with lenders on things such as the scope of the guarantee, the amount covered, and the duration of the commitment. Negotiating favourable terms can help mitigate the potential impact on your personal assets.

Getting legal advice

Seeking legal advice before signing a personal guarantee is crucial. A qualified legal professional can review the terms and conditions, explain potential consequences, and provide insights into how the guarantee may be enforced. Understanding the legal implications is essential for directors to make informed decisions about their personal liability.

Monitoring the company’s finances

Directors should always maintain a keen eye on the company’s finances and financial health throughout the duration of the personal guarantee. Undertaking regular financial assessments can help you identify potential issues early on, so you are more able to take measures to avoid defaulting on your guarantee.

Consider exit strategies

Directors should consider exit strategies in case the company faces financial difficulties. Understanding the options available, such as refinancing, restructuring, or negotiating with creditors, can help directors navigate challenging situations and protect their personal assets.

While providing a personal guarantee can be a necessary step to secure financing for a company, it comes with significant responsibilities and risks. As a company director you need to exercise careful consideration, from making financial assessments, and gaining legal advice, to engaging ongoing monitoring to make the best decision for yourself and your business.

It should be noted that the same Solicitor cannot advise the Limited Company and also the parties who will grant the Guarantee as individuals.   Separate representation will be required at that stage to give advice on the Guarantee position.