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The organisation described them as a ‘business owner’s kryptonite’ with the ability to lead to bankruptcy.
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Beware of personal guarantees, warns insolvency firm
26 June 2023
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Personal guarantees can lead small and medium businesses into bankruptcy, warns national insolvency and turnaround firm Jirsch Sutherland.
The firm said owners of small and medium businesses needed to understand the risks associated with a personal guarantee before signing up for one.
Jirsch Sutherland said a personal guarantee, also known as a director’s guarantee, provides lenders and credit providers a written promise by the director to accept liability for a business’s debt.
It meant an owner’s home, car and money in their personal account could be used to settle an outstanding debt if the business defaults.
Jirsch Sutherland partner and bankruptcy trustee Malcolm Howell described personal guarantees as a business owner’s kryptonite.
“Personal guarantees are commonplace, and with the current economic volatility, more and more lenders and creditor providers are requiring them. They’re usually provided for vehicle finance, debtor factoring or invoicing facilities, overdrafts, term loans and for credit applications for the supply of goods,” said Mr Howell.
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“But as common as they are, they’re also often described as a business owner’s kryptonite. The use of personal borrowings and mortgage guarantees for business borrowings increases household and individual financial vulnerabilities.”
“They have the potential to bring you down financially and ruin your financial freedom. That’s why speaking with a trusted adviser early on should be at the top of your list when you’re starting or running an existing business. Understand the risks and how to protect your assets and yourself.”
Mr Howell said personal guarantees had resulted in many personal insolvencies due to a failed business.
“I’ve seen many SME directors go into bankruptcy because they’ve provided personal guarantees on business debts,” he said.
“In the event of a default on a loan, or if the business goes into external administration, if the guarantee holder (creditor) doesn’t receive sufficient funds, which is often the case, they can pursue the director for the debt owned by the corporate entity.”
Jirsch Sutherland provided five tips for SME directors to protect themselves from personal exposure:
- If setting up a business or corporate entity, seek advice on the appropriate type of structure.
- Seek advice on how to structure personal assets and, or, jointly held assets.
- Read the fine print. Review every loan or credit application to understand exactly to what extent the personal guarantee is being offered.
- Negotiate and amend any document to limit personal exposure to corporate debt.
- Keep a register and copies of all documents or credit applications that have been signed and that contain personal guarantee clauses.
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