Making Personal Guarantees more palatable

Jamie’s Italian restaurant chain went into administration in May.  In the analysis that followed, it was reported that Jamie Oliver had provided Personal Guarantees to a lender and supplier as part of a financial restructuring plan last year.

Todd Davison, Director, Purbeck Insurance Services, the UK’s only insurance provider offering Personal Guarantee insurance takes a look at how SMEs can mitigate some of the risks of signing a Personal Guarantee, following the recent collapse of Jamie’s Italian. 

Normally Personal Guarantees are used by smaller businesses as a route to securing finance so this was unusual.  If the reports are true, some of his personal assets may now be used to settle the outstanding debts.

It’s always a risk taking out new finance.  Whilst not wishing to speculate on Jamie Oliver’s personal wealth, when that risk becomes personal, as it does when a Personal Guarantee is signed by the owner or director of the business for a business loan, the stakes increase considerably.

A Personal Guarantee puts your personal assets such as your home and savings on the line to settle a debt if you default on the loan. As a Personal Guarantee backed loan can be the only route to new finance for some businesses, it’s easy to see how SME owners could feel stuck between a rock and a hard place right now.  In recent research we found 1 In 4 SMEs are planning to raise funding just to stay afloat.

Aside from factors such as the continued uncertainty around Brexit, changes in shopping habits and unseasonal weather creating difficult trading conditions, when any big business collapses, the whole supply chain suffers and Jamie’s Italian is the latest in a string of well-known brands to hit the wall in the past year.

So while many owners of SMEs are weighing up whether to take the Personal Guarantee plunge in the hope the business survives and thrives with a fresh injection of cash or just to cut costs and soldier on for a few months more, fundamentally you should seek sound financial advice and fully understand the risks involved.

A finance broker is a good place to start or you may wish to discuss the options with your accountant or solicitor.

Ask how you can mitigate the risk of a Personal Guarantee backed loan, for example through Personal Guarantee Insurance.  This relatively new type of insurance offers protection against the risk that the Guarantee is called by a lender and will offset any outstanding obligations called in under a Personal Guarantee.

The level of cover is based on a fixed percentage of the Personal Guarantee the company director wishes to insure and this is dependent on whether the corresponding finance facility is secured or unsecured.

Arm yourself with facts about your business – its financial prospects and commercial value – and a list of questions so that you can gain complete clarity on the terms of the guarantee and how they will be enforced if you default on the loan.

Check how will your net personal assets will be assessed prior to the giving of the guarantee, and is this is likely to change?  Many providers of Personal Guarantee loans ask for a personal financial statement but some may require more proof of the value of your assets.

Find out whether it’s possible to negotiate the percentage of the loan you should guarantee. Not all lenders require a guarantee for the sum total of the loan.

Ask how the lender will enforce the guarantee such as through a County Court/High Court Judgement. They can either get a Warrant of Execution and get the bailiffs in, or they go for a Charging Order to secure the debt against your home.

Also establish if the lender will serve notice or seek payment on demand?  The usual route is for the creditor is to issue a Statutory Demand and give you 21 days to either settle the debt or reach an agreement to pay. However some creditors and can and will seek payment on demand.

Determine exactly constitutes a default.  If you are late paying your loan by 24 hours would that be seen as a default with take steps accordingly to recoup the debt?  In addition, confirm any remedy period upon default as some creditors allow a specified timeframe for you to pay back the default.

Finally, establish if lender must exhaust every other avenue before making demands on you, as part of the contract as some lenders are prepared to look elsewhere, such as to business assets before calling in the debt.

Signing a Personal Guarantee is a big step but when armed with all the facts and the protection afforded by insurance, it’s a step businesses may feel more comfortable to take. In fact, we found that nearly three quarters of SMEs would be more likely to take out a loan with a Personal Guarantee if they could insure against the risk of providing it.