Personal guarantees can lead to bankruptcy and SME owners should understand the risks – and the rewards – of personal liability on business debts, according to national insolvency and turnaround solutions specialist, Jirsch Sutherland.

A personal guarantee (also known as a director’s guarantee) gives lenders and credit providers a written promise by a director/s to accept liability for a business’s debt. If the business defaults, the director’s home, car and money in their personal account could be used to settle the outstanding debt. If a home is co-owned with a spouse or partner, it doesn’t automatically provide protection, as they also sign the guarantee.

“Personal guarantees are commonplace, and with the current economic volatility, more lenders and creditor providers are requiring them,” a Jirsch Sutherland partner and bankruptcy trustee, Malcolm Howell explained.

“They’re usually provided for vehicle finance, debtor factoring/invoicing facilities, overdrafts, term loans, and for credit applications for the supply of goods. But as common as they are, they’re also often described as a business owner’s ‘Kryptonite’. The use of personal borrowings and mortgage guarantees for business borrowings increases household and individual financial vulnerabilities.

“They have the potential to bring you down financially and ruin your financial freedom. That’s why speaking with a trusted adviser early on should be at the top of your list when you’re starting or running an existing business. Understand the risks and how to protect your assets and yourself.”

Five tips for protecting personal exposure

  • Seek advice on the appropriate type of structure when setting up a business/corporate entity,
  • Seek advice on how to structure personal assets and/or jointly held assets
  • Read the fine print and review every loan or credit application to understand exactly to what extent the personal guarantee is being offered
  • Negotiate and amend any document to limit personal exposure to corporate debt
  • Keep a register and copies of all documents/credit applications that have been signed and contain personal guarantee clauses