Business debt can have a profound impact on all parties connected to the company. If a limited company enters liquidation, personal guarantees come into play and company directors can be pursued for money due to creditors. Sold traders facing insolvency may become personally responsible for any money owed.
If the director has signed a personal guarantee specifically for a supplier then they are personally liable for debt. It could also depend on the terms and conditions of the personal guarantee and whether the business will resume trading. Contact us today for free, private & confidential personal guarantee help and advice.
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Most banks will not lend money to a limited company without a guarantee. This secures the business debt against assets that belong to the company partners. For example, a director may guarantee a business loan with a home. If the company enters liquidation, the bank turns to the personal guarantee and attempts to use the security, the home of the company director, to recoup the money it is due. This can leave the director homeless and without any income from the sale of the property.
The loan agreement should outline the security that the bank requires to lend the money
In addition to limited company directors, major shareholders can provide personal guarantees. Under limited liability, shareholders are protected from being sued for personal assets by creditors of the business. However, if a personal guarantee is issued for a bank loan, the individual providing it, called the guarantor, may be deemed personally liable for the debt.
Company directors should read personal guarantee terms carefully to make sure that these apply only to specific loans or debts. A comprehensive guarantee could make them liable for business losses up to the guarantee amount. Lending code stipulates that guarantees for bank borrowing may not reflect an unlimited figure. If the company has more than one director, each person can be held liable for the total amount of debt and will be pursued jointly and severally.
It may be possible to arrange a repayment plan with a bank or other creditor
If this is not feasible, the creditor may initiate proceedings against you. It will go after money in personal bank accounts, your share of equity in a home, and other assets under your possession. In this situation, it is actually better not to have any of these items because it places you in a stronger position to negotiate with creditors.
To avoid court costs or the expense to continue a claim if the director enters a defense, banks and other creditors may consider an installment payment plan or lower settlement for business debts. If there is more than one guarantor and you alone cannot make a lump sum repayment of the outstanding balances, try to get agreement on repayment of a fixed amount. This way, creditors will go after the other guarantors to recoup the rest of the debt.
When business funding is needed and a loan cannot be secured, the Enterprise Finance Guarantee, or EFG, is another option. This supports and encourages commercial lending to business with annual turnover up to £25 million that need a loan of £1,000 to £1 million and lack security. Prospective borrowers must prove the viability of their business proposition and show that they can repay their loan in full.