For many small or medium-sized enterprise directors, personal guarantees will often seem well worth providing if they make the difference in the pursuit of increased funding. However, the provision of personal guarantees to secure business finance can be something which individual directors come to regret when their company’s financial situation changes significantly for the worse.
Starting with the upsides, here’s a look at the key pros and cons of providing personal guarantees:
Easier access to business finance
Without question the foremost benefit of providing personal guarantees to sure up a business finance deal is that they make the prospect of securing an agreement considerably easier. The essential idea behind personal guarantees is that they serve to reassure lenders that debts will not go unpaid even if a business stops trading or becomes insolvent. So a guarantee from an individual director can make a big difference in ensuring that a company can access funding in the near term.
Raising funds when they are needed most
A personal guarantee can tip the balance in a company’s favour in the context of business finance negotiations. Because funding can make such a crucial difference to a company’s prospects at certain moments, a personal guarantee can potentially help establish a financial lifeline for a business when they need it most.
When all goes well, there are no issues
Providing a personal guarantee on a business finance package as a director is not necessarily an issue that has to cause any level of concern for the individual or the company involved. All being well, the guarantee will be a small detail of a financing situation that never comes to be of any real significance as a company goes from strength to strength.
And now the potential problems with providing personal guarantees:
Even the best laid plans can go awry
In all likelihood, anyone proving a personal guarantee in support of a business finance deal will hope and have every expectation that their personal assets will never enter the repayment equation. However, even the best and most creative companies can find themselves facing serious financial and debt management issues with little warning, which can then make personal guarantees a real problem for the directors involved.
Personal guarantees can be hard to erase
Once a personal guarantee has been given to a creditor in the context of a business loan or finance deal of any sort, the individual involved will often find it difficult to see those stipulations removed or rescinded. It is by no means impossible for the extent of a personal guarantee to run its course but creditors will have no interest in seeing that happen so the responsibility for establishing clarity on the point rests almost entirely with the individual who gave the original guarantee.
Guarantees might worsen your worst case scenario
For most company directors, a worst case scenario would involve their business entering insolvency and its assets being stripped to satisfy creditors. In a situation where personal guarantees have been given in support of the company’s financial facilities and then the business enters insolvency, a director will find their personal assets involved as creditors seek payments to satisfy debts. In the end, the fallout can affect not just an individual company director but their family’s assets as well, which can be enough to turn a bad situation into a nightmare.
Getting the right advice
Personal guarantees are not necessarily something to be feared or avoided at all costs from the perspective of company bosses. However, there are very clear risks involved in providing them and it’s very important for anyone considering doing so to get advice from experts on the subject beforehand.
Although, it is perhaps even more important to get advice and support on issues around personal guarantees if you have already provided one and you’re worried what the negative consequences might be. Whatever the circumstances, clear guidance can be make a huge difference for the better.
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