If you have ever signed a personal guarantee, then now is the time to review what powers your bank has and the true extent of your liabilities
Every new business that needs a startup loan from a bank tends to be in a weak bargaining position. If you are forming a limited company, the bank will probably require the directors to provide personal guarantees for the loan to the company.
Do you realise the true extent of your liability under that guarantee?
Personal guarantees are promises by individuals to be responsible for someone else's debts. These guarantees can be limited or unlimited. A limited guarantee in theory states the maximum liability of the guarantor. Be aware however that the bank can almost always add interest and costs onto the maximum figure stated in the guarantee so it isn't really a maximum figure at all.
Even if the business pays off that initial loan, the guarantee will still be in force so that if your business arranges a new loan in the future or uses an overdraft facility, then the bank can rely on the original personal guarantee for those debts as well.
Guarantees are also cumulative so that if you sign a guarantee with a limit (say of £10,000) and the bank asks you to sign a new guarantee (perhaps because the business needs to increase its loan) with an increased limit (say £20,000) then, unless the bank expressly releases you from the first guarantee, your liability will now be £30,000 not £20,000.
If you have personal savings with the bank, then the guarantee will allow it to seize these at any time to pay off any monies owed by your business.
The only way to bring your liability under a guarantee to an end is either to ask the bank to release you (don't hold your breath) or to see whether there is a provision in the guarantee document allowing you to terminate the guarantee. Normally you will have to give notice to the bank (typically three or six months) and at the end of the notice period, your liability under the guarantee is capped at the amount owed by your business to the bank on the last day of the notice period.
The trick here is therefore to serve notice and make sure the business owes the bank as little as possible (preferably nothing at all) at the point the notice period ends to reduce or remove completely your liability under the guarantee.
If you have ever signed a personal guarantee (or even worse cannot remember) ask your bank for a full list of the personal guarantees it is relying on as security for the liabilities of the business and ask for copies of the guarantees if you cannot find your own copies. Then start to take steps to reduce or eliminate your liability under those guarantees.
For specific advice on how to reduce your exposure under a guarantee, please contact Steve Petty.