Personal Guarantees - beware the risks!

Published: 10/06/2024 By Hannah Duncan

The 2008 banking crisis transformed business lending, especially for SMEs. High street banks are no longer the go to lender but have been replaced with new lenders like Capital on Tap, Funding Circle, YouLend, and IWOCA. However, these new lenders often impose strict penalties on defaults, making the guarantor liable for the entire loan as well as all future interest due!
This may seem unfair, especially to director guarantors but they are considered responsible borrowers and it’s within the terms of personal regulated debt.

What happens if you default?
Lenders' aggressiveness varies: some handle defaults reasonably, while others pursue bankruptcy or court judgments quickly. Personal Guarantees are common; not only do they give the lender security, but they also provide an extremely favourable outcome of all money returned upfront if the borrower defaults.

How to choose the best PG/Lender
It is rare to find a company who will not require a Personal Guarantee (PG) therefore its good practice to use a broker who fully understands the market and what is on offer for your specific needs and affordability. Mitigating risk involves seeking competitive interest rates, checking daily vs annual interest rates, negotiating caps on personal guarantees and being fully aware of your repayment capacities.

Are you already struggling?
If a business is already struggling financially, it's crucial to seek help rather than resort to high-risk borrowing. An Insolvency Practitioner can look at all the options available – not just insolvency – to see what’s the best way forward before you dive into signing a Personal Guarantee. Which as it clearly states, means you will be personally liable for the entire debt and more if the businesses financial situation does not improve!

The sooner you seek advice the more options available.