A personal guarantee means you personally agree to pay a business debt if the business cannot. For a company director, it sets aside the protection of limited liability for that debt: if the company fails, the lender or supplier can come after you. Guarantees are common on trade credit accounts, loans and leases, and the most dangerous one is the one you have forgotten about.
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What is a personal guarantee?
As Graham puts it, a personal guarantee is exactly what it says. You are personally guaranteeing that a debt will be paid.
If you trade as a sole trader, you are already personally responsible for your business debts. For a limited company, a guarantee changes things. Normally, the company’s debts belong to the company, although directors still have legal duties of their own. Sign a personal guarantee as a director and, if the company fails, the creditor can ask you to pay what the company owes.
That can put your savings and other personal assets at risk, and in some cases your home. A guarantee is a separate promise from you, so it can still be enforced after the company has closed.
Where you may already have signed one
- Trade credit accounts with builders’ merchants and other suppliers
- Bank loans, overdrafts and asset finance, such as vehicle finance
- Property and equipment leases
- Some supplier and service contracts
Graham sees it often in construction. To buy materials on credit from a major trade supplier, you fill in an account application, and there is a personal guarantee in it. Many people sign without realising.
Guarantees are often on the back page or in the small print of a standard form, and the person signing is focused on getting the account open so work can start. As the British Business Bank’s guide to personal guarantees notes, many lenders require you to take legal advice before you sign. Trade suppliers often do not.
Not all guarantees are the same
The wording decides how much you are on the hook for. The main things to look for are:
- Capped or unlimited. A capped guarantee has a maximum figure. An unlimited or “all monies” guarantee covers whatever the company owes.
- One debt or continuing. Some guarantees cover a single loan. Others cover everything the company owes the creditor now and in the future.
- Joint and several. If more than one director signs, the creditor can usually ask any one of you for the full amount, not just your share.
- How it ends. Many guarantees carry on until you are formally released, even after you resign as a director or sell your shares.
Why the risk grows over time
A guarantee signed when an account was small does not stay small. As the business grows, credit limits rise, and so does the amount you are guaranteeing, often without anyone pointing it out.
This is where a continuing, uncapped guarantee does the damage. You might have signed it for a £5,000 credit account in your first year. Six years later the limit is £60,000, the guarantee still covers all of it and nobody has asked you to sign anything new.
Graham has seen business owners sell or close a business and then find they are still personally liable under a large guarantee they had forgotten about.
Questions to ask before you sign
- Is there a personal guarantee in this document, and where?
- Is it capped, and at what figure?
- Does it cover only this agreement, or everything the company owes you now and in future?
- If other directors sign, are we each liable for the full amount?
- How and when does it end, and will you release it in writing?
- Would you accept other security instead, such as a deposit or a charge over business assets?
How to protect yourself
- Read what you sign. Look for a guarantee in credit applications and contracts before you sign them.
- Cap it. Graham has given personal guarantees, but always with a limit, so he knew his exposure.
- Ask for a time limit, or for the guarantee to fall away once the account has a good payment record.
- Keep a record of every guarantee: who it is with, when you signed it, whether it is capped and the current credit limit.
- Check the values regularly, especially when a credit limit goes up.
- Ask for a written release when you sell or close the business, or when you step down as a director.
- Take legal advice on large or open-ended guarantees before you sign.
A simple list is enough to start with. Note the creditor, the date signed, the cap if there is one, the current limit or balance and who else signed. Review it at least once a year.
Selling or closing the business
A sale is the point where forgotten guarantees cause the most trouble. The buyer takes over the company and its accounts, but the guarantee you signed stays with you unless the creditor agrees to release it. Include a list of your guarantees in the sale process, make releasing them a condition of the deal and get each release in writing before completion. If you are closing the company, settle or agree the guaranteed debts first, because they will not disappear with the company. Our guides to whether your business is ready for sale and exit strategy planning cover the rest of the process.
If a guarantee is called in
If a creditor writes to you under a guarantee, do not ignore it. Get a copy of the guarantee and check exactly what it covers, whether it is capped and whether the amount claimed is right. Take advice early. There is often room to agree a payment plan or a reduced settlement, and the options narrow the longer the letter sits unanswered.
Guarantees are one reason not to lean too heavily on one supplier or lender, just as Graham warns against relying on one customer in 3 things I wish I’d known when starting my business. Before you take on new borrowing at all, it is worth asking whether you need it. Our guide Business Finance: Do You Actually Need It? covers the alternatives.
Glossary
Personal guarantee: A promise to pay a business debt yourself if the business cannot.
Limited liability: The rule that a limited company’s debts belong to the company, not to its directors or shareholders.
Creditor: A person or business that is owed money, such as a lender or supplier.
Capped guarantee: A guarantee with a maximum amount you can be asked to pay.
All monies guarantee: A guarantee that covers everything the company owes the creditor, with no upper limit.
Continuing guarantee: A guarantee that covers future debts as well as the current one, until it is formally ended.
Joint and several liability: Where more than one person signs, the creditor can ask any one of them to pay the whole amount.
Release: Written confirmation from the creditor that the guarantee no longer applies.
Asset finance: Borrowing to buy equipment or vehicles, often secured on the item itself.
Related reading
- 3 Things I Wish I’d Known When Starting My Business
- When a Competitor Opens Next Door: How to Respond
- Business Finance: Do You Actually Need It?
- Business Exit Strategy Planning Guide
- Funding for your business: equity and debt finance support
- Does your accountant know your goals?
Not sure what you have signed?
We can help you list your guarantees, check your exposure and plan how to reduce it. Book a free chat with the team.