Personal Loan Guarantees – Consider the Implications
Current trading conditions have increased the demand for small business loans as businesses try to survive the short-term impact of Covid and make strategic changes to ensure their long-term survival. The Government is providing financial packages to support small businesses with cash flow issues. However, many are turning to investors and lenders to secure additional financial support. The obligations that can be written into these financial agreements are increasingly onerous and require careful consideration before signing on the dotted line.
Lenders have always evaluated borrowers to predict whether or not they will be able to repay their business loan and the terms of any loan agreement reflect the results of this assessment. In the current uncertain business climate it has become the norm for lenders to require a personal guarantee on new small business loans, irrespective of the likely future success of the business.
It is essential small business owners understand the potential consequences of signing this type of guarantee and seek legal advice to mitigate the impact on their personal assets, should they default on the loan.
A personal guarantee is a legally binding agreement in which, as the business owner, you will be held personally responsible for any debts owed by the business. Although a personal guarantee might help to obtain better terms on a loan, if you default and the assets within the business can’t repay the debt, you will be held personally liable for repaying the loan. This means the lender can legally seize any of your personal assets, to the value of the loan, such as your car or your house.
Despite personal guarantees being the current norm there are ways of mitigating the impact of the guarantee. For instance a cap could be negotiated on the percentage of personal assets a lender could attempt to collect against a loan default.
For further advice on securing the best terms for a business loan and creating an asset protection plan to help protect your business and personal assets contact Sukh Saini at Pictons.
T: 0800 302 9448