Accountants are more and more often being called on to guide clients through the complex landscape of funding. A critical element in this responsibility is the understanding and management of a director’s personal guarantee exposure.
At its core, a personal guarantee serves as a legal pledge made by a director to make sure a business obligation is fulfilled, if the business itself fails to meet its commitments.
It could be required in respect of a loan, lease or other type of business liabilities. These guarantees bridge the trust gap for lenders and creditors, offering a form of security that transcends the business' assets alone.
The legal standing of personal guarantees
Personal guarantees are written so that lenders are almost certain to recover the borrowed funds or leased assets from the directors personally, if necessary. Even in the case of insolvency.
Should a business enter insolvency, directors will almost certainly find themselves directly accountable for outstanding business debts which have been personally guaranteed. Any formal insolvency proceedings, such as administration or liquidation, do not absolve the guarantor from the obligations of a personal guarantee.
In fact, it's at this point that creditors are most likely to invoke a personal guarantee, seeking repayment directly from the directors if the principal securities fail to cover the debt.
Navigating the risks and responsibilities
The decision to give a personal guarantee should not be made lightly. While the working capital it secures can be a vital element of a business' survival and growth, a personal guarantee given when the business is already vulnerable presents a serious financial risk.
Directors need to weigh up the necessity of the loan versus the potential risk to personal assets. Exploring alternate funding sources or reassessing the business' financial strategy might be the safer path forward.
You should also advise them to thoroughly examine the terms and conditions, and suggest they seek legal advice before proceeding.
When to terminate a personal guarantee
A personal guarantee isn’t automatically terminated with the sale of a business or with the guarantor leaving it. Should either situation occur, your client needs to take a proactive approach and directly engage with the lender to negotiate a release from the guarantee.
If this doesn’t happen, the directors will still be bound to their financial obligations and could be called on to honour the personal guarantee - even if they’re no longer involved in the business.
How can we help?
The complexity of personal guarantees and the gravity of their implications cannot be understated.
The objective for accountants is clear: ensure that when directors are pursuing viable business ventures they’re safeguarding their personal financial future in the process.
If your client is concerned about taking on a personal guarantee to keep their business afloat, or about one they already have, we can help you guide them through the risk management and financial planning that goes with it.
Talk to us about your client’s situation by calling 01455 555 444 or emailing enquiries@fasimms.com
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