Personal guarantees encourage lenders to sanction business borrowing by reducing their risk in the event of non-payment. Although the risk for lenders is mitigated, directors can be pursued through the courts on a personal basis in this circumstance, and could face bankruptcy if they are unable to pay.
This video describes how personal guarantees work, and explains the liability that directors take on when providing them. Personal guarantees are commonly required when obtaining business borrowing, and when one is provided the possibility of it being called in can seem remote.
It is important to seek guidance from a licensed insolvency practitioner (IP) prior to providing a personal guarantee if you are considering taking out business credit or borrowing, as you need to understand the potential ramifications for your personal finances.
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When a company enters insolvency the lender will require repayment of the outstanding amount in full. As the company’s financial position prevents this the personal guarantee will be invoked, so negotiating a cap on liability at the outset is highly recommended.
Personal guarantee insurance policies also exist, and can limit the liability a director takes on. The ramifications of being held personally liable for repayment of a business loan are very severe.
This video explains the implications of providing personal guarantees, including the possibility of bankruptcy if you cannot afford to pay the outstanding sum. This could mean the loss of your home and other personal assets.
For further professional advice on personal guarantees and director liability, please visit www.realbusinessrescue.co.uk
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