Date:
Related Links
BKL in the press
The Perils of Personal Guarantees
North London Chartered Accountants and business advisers Berg Kaprow Lewis LLP are warning that business owners are increasingly being asked to give Personal Guarantees (PGs) to banks, suppliers and invoice discounters.
For many start-up businesses this may be the only way to secure access to lending, but since a PG makes the owner or owners personally liable for the business’s debts if it fails, taking one out is not a decision that should be taken lightly.
BKL corporate finance partner Daniel Shear said: “The main purpose of a PG is to protect a lender’s position by providing them with security should the company be unable to meet its bills. A lender may also see the fact that an owner is willing to provide one as a sign of commitment to and confidence in their business.
“When a business has multiple owners, the guarantee is usually given ‘jointly and severally’, meaning a lender can choose who to pursue for the debt. A guarantor who pays has a right of contribution from the others, but if the other parties were to disappear or be unable to pay, one individual could find themselves personally liable for the entire debt”.
If a guarantor is not able to pay up immediately, the lender will normally look to discuss a payment plan rather than seeking bankruptcy, in order to maximise the amount they received. Lenders are increasingly seeking charging orders against individuals’ homes, as this makes them a secured creditor, thus improving their position were the person concerned to go bankrupt.
In many cases, the use of a PG allows businesses to start up or expand successfully, and the guarantee is never called upon, but the potential pitfalls should still be considered before this course of action is taken.
For more information contact BKL on 020 8922 9222 and ask for one of our partners.
