Directors should think twice before waiving limited liability
Should small-business directors ever provide a personal guarantee in return for bank finance?
![model of house next to coins](https://cdn.mos.cms.futurecdn.net/JdX3N7GTzo4vjGkYuhkEHN-415-80.jpg)
Small businesses planning for 2024 may be hoping to borrow to fund their strategies for growth and expansion. But overly cautious banks are too often demanding personal guarantees from the directors of companies arranging finance, warns the Federation of Small Businesses (FSB). It has filed a “super-complaint” with the Financial Conduct Authority (FCA), the City regulator, asking it to investigate such practices.
The FSB is particularly concerned that banks are targeting directors of limited liability companies, where directors are largely protected from personal liability for debts incurred by their firms. When a bank demands a personal guarantee from the directors, this undermines the protection that the limited-liability structure is supposed to provide. Some businesses may decide this is a risk they don’t want to take, hampering their ability to grow. Others may go ahead, putting the directors in a vulnerable position.
The FCA will respond to the complaint in the coming months. But in the meantime, should small-business directors ever provide a personal guarantee in return for bank finance?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
There isn’t a right or wrong answer to this question, but it is vital that you do not sign up for such arrangements without understanding all the implications, including the fine print of the financing. In practice, this makes it important to seek independent legal advice on the loan contract.
Above all, you must recognize that by signing up for a personal guarantee, you are promising the lender that you will take responsibility for the debt of the business if it can’t pay what it owes. That gives the lender the right to come after your assets – typically without a court order – if the business defaults. Those assets could even include your home. Moreover, if you don’t have sufficient assets to repay the loan in full, you could face bankruptcy and disqualification from serving as a director for a period. Even if you can cover the losses, your personal credit rating will be adversely affected, with potential consequences for the rest of your family finances.
If you do decide to accept a personal guarantee, study the terms carefully. For example:
- Under what circumstances can the lender call the guarantee in?
- How does it define a default on the debt?
- Are you required to indemnify the lender against additional costs?
- How will defaults be enforced, and what assets could the lender demand from you?
- What rights does the lender have to demand immediate repayment of its loan?
In an ideal world, you may be able to avoid these difficulties by offering company security in return for finance, rather than your personal assets. If not, your legal team may be able to secure some protection – a limit on your personal liability, for example, or a commitment that calls will only be made on the guarantee as a last resort. The question of how liability will be shared by several directors should also be assessed.
Finally, it may be worth considering personal-guarantee insurance. This cover, available from specialist small-business brokers and insurers, pays out to help directors repay the company’s debt without having to give up their own assets. It effectively underwrites the personal guarantee you’re being asked to provide.
This cover can prove very valuable, particularly if your business suffers something completely unexpected that causes it difficulties. However, the premiums can be expensive, particularly for firms with weaker finances.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Related articles
- The best business bank accounts
- How to find an angel investor for your business
- Beware of scams on your business’s Facebook account
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
-
Pressure grows on Labour to remove the two-child benefit cap - here’s everything you need to know
The cap, which was introduced by the previous Conservative government, has been criticised for worsening child poverty
By Chris Newlands Published
-
Regulator moves to protect access to cash amid branch closures and disappearing ATMs
News The Financial Conduct Authority has told banks to start assessing if local communities have adequate cash access from mid-September
By Marc Shoffman Published
-
Could the new Growth Guarantee Scheme help boost your business?
The new government-backed Growth Guarantee Scheme is aimed at helping businesses recover from the pandemic. Is it worth considering and are you eligible?
By David Prosser Published
-
Revolut founder Nik Storonsky cashes in – what's next for the fintech billionaire?
Nik Storonsky has shaken up the banking industry with Revolut. He is now preparing a new project that could do the same to the venture capital sector
By Jane Lewis Published
-
Is local production making a comeback?
Companies return production closer to home and shorten their supply chains due to the pandemic and geopolitical turmoil. How should investors react?
By Dr Matthew Partridge Published
-
French election: an unexpected win for the left-wing
The snap French election delivered a stalemate. What does this mean for the country's stability?
By Dr Matthew Partridge Published
-
Business owners watch out for capital gains tax reforms
If you plan to sell your firm, look out for changes to capital gains tax rules by the new government
By David Prosser Published
-
How businesses can cut energy costs and boost efficiency
Here's how small businesses can monitor energy costs even though they don't benefit from the Ofgem energy price cap.
By David Prosser Published
-
What could a general election mean for apprenticeships?
Labour and the Conservatives have competing approaches when it comes to apprenticeships and funding young workers. But how are they supporting small businesses?
By David Prosser Published
-
Is online anonymity a necessity for economic and political freedom?
Online anonymity can be abused by trolls, but it remains central to our economic and political freedom, says Dominic Frisby
By Dominic Frisby Published