Not All Personal Guarantees Are The Same

“I am not signing a personal guarantee” Do you understand how the risks differ with different types of funding? Not all personal guarantees are created equal. Let’s look at how the risks differ for different facility types.

 

At the outset I would I like to say that I would never advise someone to sign a PG that they are not comfortable with. It is a personal matter based on your own risk assessment and circumstances. It is important to understand the risks.

 

Asset Finance – you are raising money against the asset you are buying. If you buy a new machine you may pay a 10% deposit and fund the balance. In the event your business fails or you don’t make the repayments the asset will likely be sold at auction. Your personal liability will be the difference between what the finance company is owed and what the asset makes at auction less any fees. By using the business asset as security your personal liability is reduced dramatically.

 

Invoice Finance – you are borrowing money against outstanding invoices. Lenders make an assessment at the outset of the likelihood of recovery of your debtor book and set a prepayment accordingly. If they set it at 85% this gives them a 15% buffer. Typically lenders ask for a PG of 25% of the line size. If your business fails you would only be liable under your PG if there was a shortfall. Again, you are protected by the business asset.

 

Unsecured Loan – the loan may be unsecured in terms of business assets but it will be secured by your personal guarantee. In the event of business failure it is unlikely an unsecured loan would be repaid from the liquidated assets of the business. As such you would be liable personally under your PG for the full amount owed.

 

Perhaps a simplistic summary but hopefully it makes a point.

 

I probably bore everyone harping on about structure when looking at business finance but this is another important example of why structure is important. Taking a simplistic view of taking overdrafts or loans is perhaps not the best option.

 

In my opinion, if you have the chance to use business assets as security you should do so. It means that your funding will be structured properly and that your personal liabilities will be minimised.