When applying for funding, businesses often need to provide certain commitments, such as security, guarantees, debentures, and warranties. Here’s what these mean for business owners and the implications if things go wrong:
Director Personal Guarantee
This applies only to Limited Companies, as these entities are separate from their owners. For sole traders and partners, personal and business liabilities are the same. A personal guarantee can be secured or unsecured:
- Secured Guarantee: Requires assets like your home as security. If the loan isn’t repaid, your home could be at risk.
- Unsecured Guarantee: If the business fails, you must personally repay the debt, which can affect your credit rating and result in a county court judgement (CCJ).
Seeking independent legal advice before signing guarantees is highly recommended, and often required by banks.
Debenture
A debenture allows the funder to take security over all business assets, which can be sold to recover debt if necessary.
Director’s Warranty
This may be required when using factoring/invoice discounting to ensure the business owner doesn’t create fake invoices. It allows the funder to pursue the director for damages if fraud is committed.
What to Do If Things Go Wrong
There are several steps you can take if your business is struggling:
- Communicate with Funders: Don’t ignore the situation. Funders may offer payment holidays or interest-only payments to help you recover.
- Negotiate with Suppliers: Propose a payment plan to continue trading. Suppliers often prefer this over receiving minimal returns through administration.
- Contact HMRC: Use the Business Payment Support Service (BPSS) if you’re struggling with VAT/PAYE/CIS/NIC payments. Prepare a cashflow forecast to show when you can repay them and stick to it.
Additional Support
These organisations can provide further assistance:
- Insolvency Practitioners
- Step Change: A debt charity for self-employed individuals and sole traders.
- Citizen Advice Bureau
Understanding these commitments and knowing your options can help mitigate risks and navigate financial difficulties. Always seek professional advice to make informed decisions.
If you need support in demystifying the world of business finance, get in touch today or register for one of our upcoming workshops.
