Let’s face it, no business owner relishes the prospect of providing a personal guarantee. As a small business owner I know the slightly sinking feeling of signing on the dotted line and the “what if’s” that run through your mind.
However Personal Guarantees are simply a fact of life. The Central Bank figures say that approximately 30% of all new SME lending requires a PG. Many small business lobby groups would argue this figure is actually higher than 30% based on their surveys.
The question is can business owners get any more comfortable with PG’s? How do you go about this? There are a few vital steps every business owner should consider when presented with a Personal Guarantee:
- Understand exactly what you are signing up to. If you are putting your name on the dotted line you need to make sure that you know what you are guaranteeing. For how long. For what amount and in what circumstances can somebody come knocking on your door for money. There are too many horror stories about of people getting into terrible legal and financial trouble over not properly considering or obtaining advice on what it is they are guaranteeing.
- Talk to your solicitor. A personal guarantee is a legal document that is usually long lasting in nature and requires you, in certain circumstances, to do certain things. You need to get the full low down from your solicitor on exactly what the document says.
- Know the underlying business. Guarantees are only called if the underlying business proposition fails. If you are providing a guarantee you need to know exactly what this proposition is. For many they may be both running the business and providing the guarantee so this is relatively straightforward. However if you are a non-exec Director or a 3rd party promoter get comfortable with the business. Establish a clear flow of regular information as to how the business is performing. Establishing regular meetings and KPI’s will go a long way to ensuring that there are no nasty surprises for you in time.
- Plan an Exit. If everything goes wrong you need to know how you are going to deal with it. Have an exit strategy in place. Have advisers ready to step in should the need arise. Know what KPI’s will trigger this exit plan. This will allow you to move quickly and hopefully not let problems become terminal.
- Have the ability to take control. If you are worried about your PG being called the worst place to be is powerless. If you are providing a PG make sure that you have the ability to step in and take control of the situation. This may mean having the ability to call emergency board meetings, taking executive control of the business or deal with lender negotiations. Either way being able to step in, if you are not in day-to-day control is vital.
- Look for an alternative. Personal Guarantees are usually sought because the business proposition is considered to be risky or a lender wants security over the assets of an individual which are not part of the business. As the business develops it can be possible to refinance the borrowers and it may be possible to do so with a provider who does not request a personal guarantee or if the business has become a more solid proposition it can be possible to seek for the PG given to be released.
- Consider an insurance policy. It is now possible to insure your exposure to a PG. Insurance can be arranged for up to 90% of the amount guaranteed over 5 years. This means that if the guarantee is called your liability can be limited and some, or all, of your exposure may be paid by the insurance policy.
It is vitally important if you are asked to provide a PG to obtain expert professional advice, know what your risks are and make sure you have access to the information and power required to allow you to step in and make drastic decisions if needed.
Stephen Curtis, Director DFI Consulting.
DFI Consulting is a niche life and commercial insurance provider. We are also the only provider of Personal Guarantee Insurance in Ireland. Further information please visit www.personalguarantee.ie or www.dficonsutling.ie