Protect Your Clients when Signing Personal Guarantees
In my experienced many businesses give away more than they should when signing personal guarantees. This can often store up a multitude of problems. Good advice when negotiating a loan can reap significant future benefits and save a fortune in unnecessary pledged assets.
Many business owners are so relieved to be granted their loan that they don’t read the small print. That’s a huge risk. As their adviser, you should help them to read the terms and not be afraid to negotiate, the terms of the Personal Guarantees (PG). If they are successful in improving their deal with the lender,consider how valuable that is in elevating your standing to your client. Not all clients will be successful in negotiating the terms of the PG, especially if they are a start-up. Lender’s still prefer to see a three to five-year trading track record. When clients borrow for their business, they will probably be asked to sign a PG. This means that if they cannot repay the loan they can lose their personal assets that they have promised to the lender. This may include their home, personal savings, insurance policies, pension pot and other assets.
Here are a few important things to consider:-
1 Spread the risk
Why take a 100% risk for a 20% stake? Sometimes, all owners of a business, not just the primary owner, must sign the personal guarantee. If there are multiple investors that own say 20 percent of the business, they might each have to sign a personal guarantee. While every investor in the business should carry some of the risk, it is not fair for a 20 percent owner to be on the line for 100 percent of the debt. You should try to negotiate to have your 20 percent investor responsible for only 20 percent of the debt.
2 Protect Jointly Owned Assets
If possible, avoid having your client’s spouse sign the personal guarantee. That way you protect the assets that are not jointly owned. In any situation where a PG is being considered and the, the wife, husband, partner and significant other is required to co – sign then it is important that they take their own legal advice.
3 Shorten the time frame
Avoid Lifetime Commitments Although many PG’s are signed “unconditionally and forever” for the term of the loan it is a good idea to negotiate an end date. For example, request that the terms of the PG only apply to a portion of the time frame which they are given to pay back the loan. I also suggest that you can negotiate an end-date on certain provisions of the PG. For example, you can ask that if you make payments on time each month, a certain percentage of the Guarantee will be reduced. This is similar to decreasing the term assurance on a mortgage.
4 Limit the Amount of the Guarantee
Another way to protect your client is to request that percentage of the loan be covered by the PG. For example, if they are borrowing £1 million you can ask to have their personal guarantee cover 60 percent of the loan, or up to £600,000. That way, if the business is unable to pay back the loan, then your client’s personal assets and collateral are not on the hook for the full £1 million. So, they would only need to settle £600,000 of the debt.
5 Beware of risking it all
Ring fence certain assets, like the family home. Specifically exclude them from the personal guarantee. So, if the loan defaults your client has a degree of protection.
DISCLAIMER This blog / article is for information and interest only. It is not a substitute for full professional advice, which will take account of the specific and individual circumstances surrounding your matter. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.
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