I am worried that I cannot afford a personal guarantee I have made – what are my options?

Debt Advice

Personal guarantees are requested by lenders to lower their level of risk, and sometimes signing a guarantee can be the only way for directors to obtain funding, especially at the start up stage of a business. Our Bolton Insolvency Experts offer advice for those who’ve entered a personal guarantee that can’t pay it. It is a common misconception for directors that a personal guarantee will never be called upon, especially when the business is profitable and growing and insolvency seems to be a distant and unlikely prospect. However, if your business does suffer financial distress and you are unable to meet a personal guarantee you will find yourself in a very stressful situation. Your home may be at risk, and if the company is liquidated you could find yourself unable to make a living.. Jason Elliott, our Bolton Insolvency Experts examines your options and explains the serious implications. First and foremost, you must obtain professional advice as to the legality of your guarantee, as there is a chance that if it’s not been drawn up correctly, it is not enforceable.

Is there scope for negotiation?

The lender may be willing to negotiate for settlement of the personal guarantee, or agree to extended payment terms for the debt. It is advisable to seek professional help prior to contacting your lender though. This would demonstrate to the lender that you are taking the situation seriously rather than deliberately trying to avoid payment. Also, they may respond more favourably to discussions with a licensed Insolvency Practitioner (IP), because of their trusted industry knowledge and experience. You can of course choose to negotiate yourself and if you do, you will need to provide well supported facts and figures to justify your proposed repayment schedule. The lender will probably request cash flow and sales forecasts, and a detailed plan for how you will cut your costs and afford your repayments.

Company Voluntary Arrangement (CVA)

Leases such as the rental of business premises can be dealt with via a CVA. If your business is fundamentally viable, this is a formal route into insolvency that allows you to retain control as a director, and trade your way out of difficulty. A CVA would halt all creditor action against the company preventing any interest and charges being added, and consolidating your debts into one single affordable payment. You will need the assistance of an IP to negotiate with creditors, and to set up and administer the CVA. If you are also at threat of personal bankruptcy, this could be a viable option. Although it will reduce your company’s chances of obtaining credit in the future, if you make all your CVA repayments in full and on time, it will reflect favourably when the CVA has been removed from the company’s credit file.

Other finance

Alternative forms of funding include asset-based lending, invoice finance, and peer-to-peer lending. They can offer distinct advantages over traditional forms of borrowing in terms of flexibility, speed of decision making by lenders, and administrative procedures. The type of company you operate will determine your eligibility for alternative funding. If you can obtain a cash lump sum or a regular injection of working capital this could stave off insolvency, and negate the need for your creditor to call in the personal guarantee. The Insolvency Experts have an extensive network of contacts in the commercial lending field and can assist you in finding the most suitable option for your business.

Personal guarantee insurance

Taking out personal guarantee insurance can help towards your financial liability, but policies will generally only cover a proportion of the guarantee rather than the entire amount. Whilst these policies can sometimes be invaluable to directors towards avoiding personal bankruptcy, insurers usually base the level of cover on the perceived risk posed by businesses operating in the specific industry, as well as the company’s history of defaulted payments. Unfortunately, the reality is that directors do sometimes do become personally bankrupt when they are unable to meet a personal guarantee. The best advice is to seek the advice of an IP immediately, to maximise your chances of financial survival on both a personal and business level. If you are concerned about an existing personal guarantee or if you are thinking about entering into one, contact our Bolton Insolvency Experts on 0300 303 8284 or via our contact us page for advice on the benefits and drawbacks. We can also negotiate on your behalf with the lender.