A Word About Personal Guarantees
18/7/2017 | Insolvency
It's stating the obvious. But, often, at a time when they are given the guarantor (usually a director) doesn't think clearly enough about the consequences of these being called upon.
Take a lease with the tenant being a limited company. The landlord is likely to request a PG from the director or directors. Sometimes the lease can be for many years before there is a break clause. From a director's perspective it is vital to explore whether this can be avoided or limited at this point. All too often accountants are presented by clients with their business arrangements (including an approved lease) finalised. The lease is never an issue until, a few years later, the business has financial difficulties, often through no fault of the management and the reality of the PG hits home - by which time it's too late.
So let's rewind this scenario and consider what could have been negotiated;
- The tenant company pay a larger deposit to avoid giving any PG's
- The company itself provides the guarantee rather than the directors (perhaps coupled with a larger deposit)
- Any PG is limited to a fixed sum agreed in the lease
- The directors refuse to agree to a PG
- Alternative premises be identified
- Don't proceed
Ok, so the landlord may not be prepared to negotiate, but is he prepared to lose a potential tenant?
There are so many risks for a new business and the directors need to fully weigh these up at the outset and carefully consider the impact of failure. The personal positions of all of the directors also need to be thought through. One director (perhaps older) may have more wealth than a younger director and significantly more to lose.
Unfortunately, we often see situations where businesses do fail and we can't rewind the facts.
If you know anyone that would benefit from talking through a particular scenario please feel free to pass on my number or contact me, Tim Corfield directly or a member of my team.
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