Once you have established your product or service, your market need, and your business plan and you have launched your business most likely, you will have encountered requests during the course of your start-up that make you personally liable to risks from your business not succeeding as you would have hoped.
It is commonly the case for any Bank finance for a new company that you would be asked for personal guarantees over that Bank finance/overdraft. At the outset, you should consider whether you wish to run your business personally or as a Limited Liability Company. The incorporation of a Company provides you with the protection of a limitation on the exposure to the Company itself. In other words people doing business with the Company cannot look beyond the Company to recover debts due by the Company to them.
That being said in a number of instances you will be asked for personal guarantees. Most commonly if you require any Bank finance, a Bank will typically expect a personal guarantee of one or two of the Directors of the Company over the finance being afforded to the company to operate the business. This can be over something as basic as a company overdraft or a term loan for the purchase of company equipment.
In addition, for any new company, it is commonplace for a Landlord or Licensor of any property to require personal guarantees of at least one if not two Directors. This means that the Directors of the company are personally liable to the Landlord for the rent, rates, insurance and all other outgoings that are payable to the Landlord under any Lease or Licence.
In advancing your business a certain amount of personal exposure is commonplace for any new company. If you do not incorporate, every debt of the company is a personal liability to you as you operate the business personally, even where you operate under a business trade name.
If you do incorporate and you are subject to personal guarantees then you should consider an exit strategy for the removal of those guarantees to minimise your risk. In other words, at the outset, you should discuss with the Bank the conditions under which personal guarantees are to be removed for the facilities afforded by the Bank. This is commonly allied to a trading position and a healthy balance sheet after a fixed period of time (e.g. two to three years). In relation to the leasing of property for the operation of a business, you should again have discussions with the Landlord from the outset as to the conditions under which any personal guarantee should be released (e.g. an automatic discharge of the guarantee after two to three years upon successful payment of the rent and all other outgoings) and if available given the market conditions and negotiations for your release you should further consider a limitation on the amount of your exposure (e.g. capped at the value of three to six months rent) these small measures will give considerable comfort to any business owner in the long term by alleviating the exposure on a personal basis so that their attention may focus to the due operation of their business without fear of personal loss.
We are happy to discuss a risk abatement strategy with new business owners to help them identify the broad heads of personal risk associated with their business that they must familiarise themselves with and to advise them appropriately.
