Personal Guarantees and Directors’ Liability with Business Debts

Are you worried about some personal guarantees in your name?

A personal guarantee is an individual’s legal promise to repay credit issued to a business for which they serve as an executive or partner. Personal guarantees help businesses get credit when they aren’t as established or have an inadequate credit history to qualify on their own.

Business debts usually have limited liability with the directors not being asked to repay any debts owed from the company.

But if a personal guarantee is signed the business debts can become a personal debt of the director who has guaranteed repayments.

In this Personal Guarantees guide, we explain everything you need to know about any legalities of the debts owed in April 2024.

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Getting Advice on Personal Guarantee Concerns

If you are worried about issues around personal guarantees as a company director you’ve given in support of a business finance arrangement it is very important you seek professional debt advice.

Throughout the UK there are many business finance experts and insolvency specialists who offer free advice and support to business directors during difficult moments.

A Personal guarantee can become a source of real worry when a company’s financial position is such that creditors are calling in their debts and assets are being seized. For directors, having personal finances and assets become part of the corporate insolvency picture can be a nightmare scenario.

Problems relating to personal guarantees will not disappear on their own and dealing with them properly requires concerted effort, cooperation between relevant parties, well-informed advice and proactive steps to be taken on the part of directors.

Get in touch today to speak directly to an insolvency and company rescue specialist. Offering free and independent advice, by phone or at your place of work or one of our UK offices could be one of the most valuable decisions you make.

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What is a personal guarantee by directors?

When directors take out a personal guarantee’ with creditors they are personally guaranteeing to repay any debts of their business to the lender.

Some business lending providers might ask for a personal guarantee if the company has an inadequate credit history.

If one or more company directors personally guarantees to repay any debts then legally if the business is unable to meet its financial obligations, the debt can be chased personally to the directors which put the director’s personal assets at risk.

How long does a director’s personal guarantee last?

Even when a director is not involved with a company, the guarantee will not leave. This director’s guarantee can last forever.

This can often be a shock, however, being liable for a company’s debts is serious.

Will a guarantee be enforceable if a director resigns?

More times than others, the personal guarantee for a director will still be enforceable if the director resigns.

When business owners and directors face significant financial pressures on an outstanding balance, it is likely to hear of resignation.

Things to consider before a personal guarantee

Before you agree to a personal guarantee, there are many factors that you should consider:

  • Liability- You should understand what the liability act is, this will show whether you are personally liable or if the lender and company is jointly liable.
  • How the guarantor terminates the guarantee- A guarantor can discontinue their liability with the relevant legal advice and notice given to the creditor/bank here the business credit card is relevant to.
  • When the enforcement will start- Understanding when the guarantee starts from will help with security and assurance.

All Personal Guarantee Agreements

There are a variety of personal guarantee agreements

Personal Guarantees for CBILS

Coronavirus Business Interruption Loan Schemes were brought in and designed to assist with the financial downfall and cash disruption many small/medium end businesses faced through the pandemic.

As many businesses were frequently struggling to access any funds, they were beginning to seek personal guarantees to resolve this issue.

When seeking and accepting personal guarantees, the deal will tie the director directly to the agreement, enabling the borrower to seek out help from the director instead of the company.

Personal Guarantees on Commercial Leases

A personal guarantee agreement will often come into action when someone puts their own personal assets at risk, a commercial lease is included in this.

Commercial leases will occur between a business tenant, your company, and a landlord. This can often be referred to as a commercial property or income property.

When a company takes on the ownership of a commercial building, the landlord will commonly ask for a personal guarantee on the property to minimise any risks involved.

The personal guarantee will usually happen with the director of the company as the business owner. The directors personal guarantees make them personally liable for paying the rent of the building when the company cannot pay.

Personal Guarantees on Business Loans

A personal guarantee on a business loan will be included into a situation when making an agreement between the business owner and a lender as the business may not be able to pay a loan.

The owner, acting as a business loan guarantor, will agree to be responsible for paying back a loan if the business can no longer pay.

A personal guarantee is commonly found in business loans with small businesses, this is because usually, a small business will not have sufficient funds, making the risks a lot higher as they are harder to trust.

You can find an advantage in seeking a personal guarantee within a business loan guarantor as the lender will have more trust in you as a business, therefore, this is an incentive to give you more money.

You can also find benefits in personal guarantees as they can help you to achieve growth in your business as the company will not plummet.

Personal Guarantee With Funding Circle Business Loan

Funding Circle is a loan provider that will work with you and your company with a business loan.

When you come to the realisation that your business will not be able to make any more repayments of your loan, Funding Circle will and the business owner will make an agreement (known as the Person Guarantee) to state that the owner will be responsible for paying back the loan.

Funding Circle have stated that with ANY business loan provided with their company, a personal guarantee MUST come into action. This will usually come in to action after four monthly missed payments.

Having a personal guarantee is important for loan providers as they can place more trust into your business, leading to them giving you more money.

With an unsecured business loan, Funding Circle have agreed that you can borrow as much as £250,000 without having to use your business assets as collateral!

Funding Circle strives to recover as much of the investors funds as possible whilst compromising the charges, interests, and costs!

Personal Guarantee With Capital On Tap Business Loan

When your business is slowly diminishing as finances are becoming difficult to pay, Capital On Tap will have the legal and immediate right (as a lender) to request a personal guarantee from the guarantor.

Usually, after a missed payment in full, this will occur.

Being the executive, company director, or partner to the business struggling financially will require you to be the guarantor if you agree.

Capital On Tap has stated seeking independent legal advice before agreeing to any personal guarantees would be incredibly advised.

Check out our guide for more information if struggling to pay Capital on Tap business debts.

Personal Guarantee With Iwoca Business Loan

iwoca stands for instant working capital and they offer business finance solutions to many companies in the UK.

For UK limited companies the iwoca business loans come with a personal guarantee attached the director needs to sign.

Check out our guide for more information on repaying iwoca business debts.

What disadvantages are there for personal guarantees?

There are a couple of disadvantages you can find that come from a personal guarantee, however, you can be assured that advantages do come from this too!

Here are some possible disadvantages:

  • The process can be lengthy.

Despite being a long involvement in a personal guarantee, you will find that the procedure without the agreement is much longer and more difficult!

  • You can be placed in a liable position.

When you agree to the personal guarantee, you are in a position that will make you risk your personal assets (such as your home).

  •  This can be detrimental to your business

When you do not have enough credit to support your business anymore this can be seriously threatening to your company and can cut the lifeline very short.

What advantages do personal guarantees provide?

Advantages are the main priority for everybody, and you can be assured that there are many benefits that come with a personal guarantee.

Here are some amazing advantages that you will experience:

  • You will have access to more lenders
  • You will also have more access to lower rates.
  • You are more likely to get that loan agreement
  • Business growth will be massive

How do you get around a personal guarantee?

If you are completely against the thought of personal guarantees, there are ways around this, however, they are often risky.

Here are some of the ways you can get around a personal guarantee:

  • Go into an IVA (Individual Voluntary Agreement)

Going into an IVA is fairly common when someone mentions a personal guarantee. This will make you pay the debt over a spread period around 3-5 years.

People usually avoid an IVA as it can be difficult to obtain credit.

  • Renegotiate the contract

Renegotiating the contract can enable you to ask for a different time frame (eg: shorter)

  •  Bankruptcy

This should be the complete last option when going around a personal guarantee.

How secure is a personal guarantee?

A Personal Guarantee (often referred to as a “PG”) is a form of collateral security.

Personal guarantees act as security for the lender so an individual will promise to repay the credit or debt they’ve issued if your company fails to.

The PG allows the creditors to lend more to a company when it has a form of collateral security (i.e. personal assets secured against the debt).

How do I protect my assets from a personal guarantee?

There are a variety of protection methods for ensuring your assets are safe from a personal guarantee. Here are some systems that can help with the security of your valuables:

Corporations

Corporations can protect your assets as the business organisation will be liable for the corporate assets.

There are different types of corporations to work with:

  • C corporation
  • S corporation
  • Limited liability companies

Trusts

A trust is known as one of the best ways to protect your own assets. They are effective and easier to manage than any other protection method.

You would have a trustor, who will manage the assets of the trustee.

Depending on the rights of the grantor, there is a revocable trust (the rights to alter and amend the trust), or you could be involved in an irrevocable trust (no rights for the amendments in a trust).

Limited Partnership

The limited partner does not have any personal liabilities for the debts of their partner.

The assets will be acquired by the partner of the LP and will be held by them.

Do personal guarantees hold up in court?

A personal Guarantee can be enforceable in court.

Usually, the lender would request the action from the guarantor in court, ensuring that they take in the following factors:

  • Documents are signed
  • Everything is interpreted correctly
  • Secondary liability

When brought into court to enforce the personal guarantee, you should understand some challenging issues to bring up:

  • What documentation is presented and who has them?
  • Has the creditor correctly proceeded?
  • Can a defense be available to the creditor?

Does a personal guarantee have to be signed?

To avoid any fraudulence, you must provide personal guarantees with a signed contract for any limited company.

What does signing a personal guarantee mean?

Signing a personal guarantee means that the agreement is in place between business owners and lenders.

Providing personal guarantees signatures will ensure that the individual is responsible for the loan repayment if the business is unable to repay.

How long is a personal guarantee valid for?

A personal guarantee will last for the length of time that it takes for you to pay it off.

Paying this off will lead to the business being released from the debt.

There is occasionally a limitation period around 6 years, however, this can go all the way up to 12 years (this would be a deed).

The six years will begin from when your bank calls in the debt, not from the signing of the guarantee.

Can a personal guarantee be invalidated?

If a circumstance outside of your contract occurs, such as a fraud suspicion or being misled, the guarantee can be invalidated.

When a lender does not give you all the information that is required to know for your personal finance issues, the guarantee is unenforceable.

Struggling To Pay Business Debts

Here are some other business debt guides if you are struggling with different types of debts:

Business Debt Help

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