Personal guarantee risks for company directors
Personal guarantees are a common requirement for business loans and credit agreements. While they can help secure funding, they also expose directors to significant financial risks. Understanding these risks is crucial for directors to protect their personal assets.
Why Directors Use Personal Guarantees
Lenders often require personal guarantees to reduce their risk when lending to businesses. Directors sign these agreements to secure loans, lease agreements, or trade credit, particularly for startups or businesses with limited credit history.
Risks and Liabilities
Signing a personal guarantee means directors are personally liable for the debt if the business cannot repay it. This can lead to:
- Personal asset seizure, including homes and savings.
- Legal action from creditors.
- Personal bankruptcy if debts are substantial.
Mitigating Risks
To limit personal liability, directors should:
- Negotiate limited guarantees rather than unlimited ones.
- Seek shared guarantees with co-directors.
- Obtain personal guarantee insurance.
- Ensure clear exit strategies from agreements.
What Happens if the Business Fails?
In the event of insolvency, personal guarantees may still be enforceable. Creditors can demand repayment from directors personally, potentially leading to severe financial consequences like liquidation.
Legal Advice and Next Steps
Before signing a personal guarantee, directors should seek legal advice to understand their obligations fully. Reviewing agreements carefully and exploring alternative financing options can help mitigate risks.
Need help with your business?
Personal guarantees can provide access to essential funding but carry significant risks. Directors must assess their financial exposure carefully and take necessary precautions to protect their assets. If you need help, contact us online today or give us a call at 0161 476 9000 for a free confidential consultation to discuss your options and find the best path forward for your business.
