If you’re considering finance for your business, and the business itself has no substantial assets, you will almost certainly be asked to sign a personal guarantee.
This document allows directors, or other company members, to offer personal assets as loan security, allowing the business to gain the necessary funding to grow.
This article will explore the benefits and risks of signing a personal guarantee.
What Happens When You Personally Guarantee a Loan?
The main thing to realise is that these documents are legally binding, so before you put your house on the line you need to clearly assess the risks involved.
When a business is in its infancy, there can be a huge amount of passion and focus and the thought that the business may fail in the future could be hard to imagine. A real-world view, however, is that sometimes businesses fail despite everything. Perhaps the market changes, perhaps customer habit shifts. Since everything we do in business is based on a constantly changing landscape, we must be prepared for the worst to happen as part of being forward thinking.
If the worst happens and you’re operating via a limited company, then you have a lot of protection from corporate debts. Even if the business closes and all of it’s assets are liquidated, you as director can walk away and it certainly shouldn’t impact your family finances, assuming no wrongdoing has occurred.
That is unless you’ve signed a personal guarantee document. In that instance, the failure of your company could mean the loss of you family house, which makes an already stressful situation much worse.
Can You Get a Business Loan Without a Personal Guarantee?
Unfortunately, it is near impossible to borrow substantial amounts of money without collateral, as the lender needs to consider their level of risk.
You can, however, use your invoices themselves as a means of gaining finance. This is known as invoice finance and can make a substantial difference to working capital on a monthly basis.
Another possibility is where someone is a subcontractor to a large and well known company. In this scenario, the established brand may sometimes agree to guarantee the loan for the subcontractor.
Other than these two options, there is really no way to obtain finance without offering collateral.
Personal Guarantee Insurance Can Mitigate Your Risk
Given the widespread use of personal guarantees, a new insurance product which mitigates the risk of signing one is extremely useful.
Personal guarantee insurance can be paid annually by the company, so needn’t impact personal finances, and mean that a director can put up a personal asset with far less risk.