The Risks of Finance

Often business will apply for funding and in return will be asked to provide commitment from their side. This can be in the form of security, guarantees, debentures, warranties and so on. So what does this mean for the business owner and what happens if things go wrong?

Director personal guarantee

This can be secured or unsecured and relates to finance taken by Limited Companies only as the company is a separate entity to the owners who are treated as employees of that company. With sole traders and partners this is irrelevant as you are the same entity and if your business ceases then they can come after you personally to repay a business loan.

With secured they may ask for you to provide your home or other assets as security and add a charge to your home. Therefore if you do not repay your loan, even it if it is unsecured, your home could be at risk under a secured personal guarantee.

Unsecured is where if your business fails then you are guaranteeing to personally repay that debt. This may result in impacting your credit rating and a county court judgement (CCJ)
It is recommended that you seek independent legal advice before signing guarantees (most banks will insist on this anyway).

Debenture

This is where the funder will take security on all the business assets which they can then sell to recover their debt.

Directors Warranty

Sometimes required where a company uses factoring/invoice discounting to ensure the business owner will not create a fake invoice etc. This allows the funder to pursue the director for damages.

What to do if things go wrong

There is plenty of help on hand if your business is struggling to make ends meet. The first thing is not to bury your head in the sand and talk to your funders. It is generally expensive and time consuming for funders to pursue debts especially through the courts and as such will look to come to an arrangement such as a payment holiday or paying just the interest until the business is back on its feet.

You can also talk to your suppliers to see if they will accept a payment plan to enable you to continue trading out of your difficult situation. Many will accept this as it is preferable to administration where they will be lucky to see a penny in the pound on the money you owe them.

In addition you can contact HMRC through their Business Payment Support Service (BPSS) if you are struggling to pay VAT/PAYE/CIS/NIC payments. Be sure that you have completed a cashflow forecast (this should be done anyway) so you can tell them when you will be able to pay them back and keep to what you have told them.

Finally the following organisations will also be able to help you:

• Insolvency practitioners
• Step Change – a debt charity which helps self employed and sole traders with debt problems
• Citizen Advice Bureau