The Personal Guarantee (PG) doesn't have to be a dirty term Edition 2.O
the truth about PG’s in funding
Happy New year (if we can still get away with saying that :), but seeing as this is our first post of the new year I am going to give us the benefit of the doubt.
We sent the first edition of this newsletter out in September 2023 but as we have been speaking with clients and partners and then reading what info there is available about PGs we thought it was really important to bring an updated version to you so you can understand the misconceptions of a Personal Guarantee (PG) when it comes to non-dilutive funding.
On the 11th of Dec, Tony (Risecap’s Founder and Director) sent me an article from the UK Small Business Magazine that said, “Around 45 percent of business owners back away from finance if a personal guarantee is attached, according to a May 2021 Purbeck Personal Guarantee Insurance survey.”
But what I read in another article tagged from the UK SB about PGs said, “More than half (55 percent) of SME business owners do not know what a personal guarantee is, with 21 percent believing it only means that business owners would pay the money back on time to the best of their ability.” sick
Coupled with the data from our clients and these articles it made sense that people are sensitive around the topic of PGs when applying for business financing for 2 main reasons.
They don’t know what a PG is and automatically assume that unsecured funding with a PG is actually a secured facility. (Don’t worry I thought the same thing 😂)
Having to provide a PG means they are taking a step backwards in the progress of their business and their life (stay with me here) “I am not safe, I do not have security, as my limited company and personal assets are supposed to be separate”
Most people believe that when they buy a home they have secured a certain level of ‘stability’ and security in their life.
Then if their business is healthy and their broker, bank or lender comes back and tells them that to get the type of facility/ funding that they were expecting, requires them to have one of their directors put up a PG (90% of the time is their home or a property is their main asset)— this feels like a step backwards and immediately initiates a fear response that says, “I am not safe, I do not have security” and they turn down a great offer that could possibly expand the business further with the right investment (people, property, system, companies, data, services).
So let’s break down what a PG is and how we can calm our survival fears in the process— so that we have a clear mind, body and heart, for when the funding offer that is The Right One and requires a PG, we are ready to move forward confidently.
The core difference between a PG and a secured loan is that a PG is a signed promise that states that the directors will pay back the funding even if the business defaults or goes bankrupt. This means they are still liable to repay but the lender has no legal right over the property. As an example, the borrowers can go into a corporate voluntary arrangement (CVA) to repay the debt over smaller manageable payments.
In contrast, a secured loan means if the business defaults or goes bankrupt, the collateral used (i.e. Property) is pledged as security legally and has a legal charge against it. This means you couldn’t sell the property without having to pay the lender back or in very rare cases, the lender can potentially enforce the sale of the property in court. Generally, though most reputable lenders want to work with the borrower and not against them. (These are also the lenders we like to work with :)
With a PG, lenders also have reputational risk so it’s in their interest to come to a settlement or arrangement with the borrower if the business was to default.
To squash the fears of the hypothetical but very real fear of losing your home in the instance that your business goes insolvent we partner with a firm that provides PG insurance (is an annual insurance policy that provides directors with cover in the event the business lender calls on their personal guarantee following insolvency.)
The main idea of a limited liability company is ‘supposed to be’ that it is its own legally separate entity. So one of the purposes is that if the business fails or goes bankrupt you and your family aren’t going bankrupt too i.e. house is taken away.
This is why we walk every client through every scenario and it’s our DNA to help them understand why things are the way they are and to also empower them to make the best decision for their businesses.
If you would like to book a consultation with us feel free to book one here.
with gratitude
The Risecap Team
Words: Alex Verville Risecap Head of Ops