Limited liability companies have certain benefits over carrying on in business under your own name.
High on the list of benefits (if not at the top) is the fact that those owning companies enjoy protection of their assets if the company suffers financially (there are some exceptions to this, unsurprisingly).
This leaves lenders in a very precarious position when extending finance to a company and that is something that they are often not prepared to consider to be an acceptable risk, even for established, solid companies. This is where the personal guarantee comes into play.
The purpose of the guarantee is to give the lender a contractual legal right to sue the guarantor personally in the event that the company fails to meet its repayment obligations. In simple terms, this means that the person giving the guarantee is putting all of their personal assets (house, car, savings, etc) on the line to guarantee the company’s ability to repay.
This means that where a personal guarantee is given, the benefit of limited liability is effectively brushed aside and the person with the benefit of the guarantee (i.e. the lender), finds their own possessions and other assets at significant risk.
Great care must be taken when agreeing to give a personal guarantee and legal advice should be taken (and is usually required by the lender) so that you are clear about the extent and effect of the guarantee required.
Also remember, personal guarantees don’t usually fall away automatically when a debt is repaid, it is often necessary to formally request that they be cancelled.
So, personal guarantees most certainly do have a dramatic effect on the benefit of the protection given by the basis of limited liability provided by companies. They should not be entered into lightly.
By Daniel Gardener
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