A limited liability company protects the personal assets of the shareholders but that can often hinder finance options so business owners often become Personal Guarantors. So what exactly are the implications of becoming a Personal Guarantor? In this short video JPP’s Managing Partner Mark Glenister explains ……..
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I’ve said before (in the video Why do you need Limited Liability) that the main benefits of the limited companies that it does what it says on the tin, it limits the liability of shareholders.
But there can be catches business owners sometimes agreed to enter into personal guarantees, and by doing so they give away some of our shelter of limited liability, as a limited liability company only limits the liability of shareholders.
It is only shareholders and significant shareholders in owner-managed businesses who should consider entering into a personal guarantee. Banks and other creditors ask owners of businesses for personal guarantees when they think that the business itself is not financially strong enough. So the advantage is that the company or other business gets the credit line all along that otherwise would not be available. The disadvantage is that the personal assets of the guarantor are on the line they’re at risk, guarantors should be aware that the courts regularly enforced guarantees against guarantors, your assets are really at risk.
So what should you be aware of? The first thing is that all guarantees are different from each other, so you should seek legal advice. Usually business owners feel that they have no real choice other than to enter into the personal guarantee if they want their business to grow.
So the real question is, what are the risks what are the main risks in personal guarantees? The guarantee may be limited to a certain amount but that’s not always the case. The main clearing banks in the UK subscribe to the lending code, which means that their guarantees are always a limited amount and obviously guarantor should be happy with that amount. But the point to note is that it’s that amount plus costs and expenses, and the costs and expenses of enforcing a guarantee may be significant.
If the business is in financial difficulty the bank doesn’t have to wait for it to become insolvent or to take any legal action against it before claiming unpaid amounts from the guarantor. It’s often not apparent to personal guarantors that their guarantee will not only cover the first loan made to their business by the lender but also the second and any subsequent loans. If the loan is from the same lender the last point is about the cancellation and termination of personal guarantees. They do not cancel themselves, so business owners who’ve given a guarantee should remember to cancel them when appropriate. If you don’t cancel guarantee when you should you could still be liable under the personal guarantee in relation to a loan you’ve not approved when you cease to be a director or when you cease to be a shareholder.
Once the company repays the first loan if you cease to be a shareholder or if you cease to be a director remember to cancel the personal guarantee.
