To PG or not to PG, that is the question.....

With the end of the government, acronym fuelled (BBL, CBILS, CLBILS, RLS) lending schemes almost behind us, the debate over personal guarantees is likely to rear it's head again. Pre these schemes, a facility without a PG was very much the exception but with 2 years of government backed lending with no guarantees, will a businesses expectation be risk free lending going forward?

WHAT IS A PERSONAL GUARANTEE

It kind of is what is says on the tin. It is the individuals in the business guaranteeing that if the business is unable to repay the liability, the individuals will step in and repay it.

WHY IS IT IMPORTANT FOR A LENDER

Despite the obvious having 2 chances of being repaid (firstly from the company and then from the individual), the owner(s) of a business guaranteeing the obligation is a clear sign that they believe in the future of the business. It also means that the people who will benefit from the finance, have some potential risk associated, often called "skin in the game". As a lender, if the individuals aren't prepared to take any personal risk, why should they as the lender take the risk?

CONSIDERATIONS FOR THE BORROWER

Giving a personal guarantee is all about risk management. Noting that nothing is risk free and even the healthiest enterprises can go out of business, sometimes through no fault of their own, one question is key....... "Is the juice worth the squeeze?" The juice is the positive consequence from borrowing the money - increased sales, improved profitability, higher dividends. The squeeze is the risk:-

1. What are the chances of the business failing
2. If the business does fail, are there any other assets (inventory, receivables etc) that will enable the debt to be repaid before it get's to a PG
3. If the PG is enforced, what is the liability of the PG set to - it can be the facility amount but can often be reduced amount

HOW CAN THE RISKS BE MITIGATED?

Working with an expert on sourcing finance certainly helps. Brokers have strong relationships with lenders, and often leverage to be able to negotiate. They also have experience of which types of facilities require guarantees and which don't, and which lenders can be more lenient. Taking advice from somebody that goes through this process daily can only benefit you.

If you are looking for finance or have an offer that includes a personal guarantee and want some free independent advice, feel free to give Sedulo Funding Solutions a call.