Personal guarantees: are they worth it?

A personal guarantee from a director means that, if their business cannot pay a bill, repay a loan or honour any other outstanding debt, then the director will cover it him or herself.

It sounds logical, moral and reassuring.

But is it? Or are personal guarantees a way for a company to give their suppliers an artificial sense of security that will fall apart in practice?

A guarantee can be useful

Certainly, a personal guarantee can be useful.

One of the things we flag up to our clients is the need to get a personal guarantee written into their agreements with their customers. That way, if the business suddenly can’t pay its bills, our client has another route to getting payment – they don’t have to wait for the company to be insolvent.

But it’s not always straightforward.

For example, some companies hand out personal guarantees to ALL of their customers – and when the company gets into financial difficulty, it is impossible for the director or directors to honour every guarantee.

Meanwhile, you may have extended credit to them on the basis of a guarantee that would be unenforceable.

Some companies do not even realise they have given a personal guarantee because it was written into the details of their credit agreement – and they failed to spot it. So they will dispute its validity.

Who owns the business?

One useful thing to do is to verify that the director who has given you the guarantee is actually the owner of the business. You can check this and other information, such as how many mortgages there are on the business premises, through Companies House and Land Registry.

How we can help

If you need more practical steps, we can help you by:

  • Reviewing your account opening and credit control forms to include a simple form of personal guarantee.
  • Monitoring the credit worthiness of your client and advising you of any important action to take if the company’s credit worthiness is reduced, for example.
  • Spotting when directors change and assess whether that will affect any personal guarantees in place.
  • Highlighting any changes, positive or negative, which could affect the way you deal with that particular company.

Personal guarantees sound like both a moral and a legal commitment by your client to pay their bills. But, remember, it’s not always the case.

And you don’t want to find out too late that a personal guarantee isn’t worth the paper it’s written on.