Article by Bev Budsworth MD of The Business Debt Advisor
Personal Guarantees or “PG’s”
It is almost impossible to avoid personal exposure to debt when setting up your limited company/business.
Banks, other funders, suppliers, leasing companies frequently will require directors or shareholders to provide personal guarantees, “PG”’s as additional security for loans/finance. Frequently business owners will also use personal loans as start up or to support cash flow in lean trading months.
According to a survey by Purbeck in 2019, 32% of companies with a turnover between £1M and £99.99M who have taken out business finance were required to sign a PG. The survey also revealed that just over 60% of the business owners weren’t aware that their personal assets were at risk if the company was unable to repay the finance.
In the event of default of the loan, the lender generally will issue formal demand which means the loan becomes payable in full. If the repayment proposals are not acceptable, the lender can apply for judgment and seek to secure the debt on personal property. Alternatively, they can issue a 21 day statutory demand and if this is not complied with, follow with a petition for bankruptcy.
Setting up a business is scary. Without personal guarantees you are unlikely to be given finance. It is also a catch 22 scenario – a business with strong results, good credit rating will be offered finance but you have to get their first.
Coronavirus Business Interruption Scheme (CBILS)
In the current climate, it is important for businesses to understand what help they can receive. The Coronavirus Business Interruption Scheme has been set up to support small and medium sized business with a turnover of up to £45 million.
It provides access to loans, overdrafts, invoice and asset finance of £5 million for up to 6 years. In addition, the Government will make a Business Interruption payment to cover the first 12 months of interest payments, this means smaller businesses will benefit from no upfront costs and lower initial payments.
The government will provide lenders with a guarantee of 80% on each loan (subject to pre-lender cap on claims) to give lenders further confidence in continuing to provide finance to small and medium-sized businesses.
The scheme is delivered through commercial lenders, backed by the government-owned British Business Bank.
It is also worth noting, that under the scheme, lenders will not take personal guarantees of any form for facilities below £250,000.
Fear of failure keeps business owners trapped
Fear is one of the most powerful forces in life. It effects the decisions you make, the actions you take and the outcomes you achieve. The primary role of fear is to protect you but it significantly becomes a massive obstacle to achieving progress.
According to Psychology today, the fear of failure can cause even bigger problems that affect a person’s physical and mental health. People with fear of failure often experience fatigue and low energy, they feel emotionally drained, they are more dissatisfied with their lives, they experience chronic worry and hopelessness, and their performance in the relevant domains becomes objectively worse.
In my view, the fear of a business failing and the implications for the directors in terms of personal exposure to debt, is one of the most debilitating experiences that an individual can experience. You get caught in a spiral of fear which prevents you from acting logically. So often I encounter situations where directors have continued to pump personal funds into a business and actually they know they are sleep walking into utter disaster.
Taking Action
Lying awake at night constantly beating yourself up will make you ill. It takes courage to talk to someone but you will almost immediately feel better.
Over the years I have worked with psychologists, one of which became a personal friend, Sue Smith. She introduced me to the concept of E plus R = O.
EVENT PLUS RESPONSE EQUALS OUTCOME
Event
Lives can be utterly ruined when individuals constantly beat themselves up about their current position. It is important to realise that behind most successful business person is a failure or near failure. So event is accepting you are where you are, you cannot change the past and allow yourself to look forward.
Outcome
Your recovery plan needs to have a goal. Where do you want to get to, what does it feel like when you get there. The outcome could be dealing with the debt, arranging payment plans which are affordable and finding your self-respect.
Once you have identified what your outcomes looks like, it time to develop your response to get to your outcome.
Response
This is developing your plan to get to your outcome. I recommend having a macro and a micro plan.
Macro Plan
Your macro plan is how you are going to get from a business that is failing, to a position where your earnings are more secure and your debt is being dealt with.
If both the business and the individuals are struggling with problem debts including PG’s that cannot be serviced, it may make sense to wind up the business and either start up a fresh business or, if continued trading is not viable, the director seeks employment and proposes an Individual Voluntary Arrangement to deal with PG and other personal debt.
The plan depends on your circumstances, your assets and debts and also your income and expenditure. There are tools online such as our debt calculator that will help you identify your debt, how much this is costing and how much money you actually have remaining at the month end to pay towards your debt.
This exercise is vital and will help put you back in control. If you struggle to do this on your own, our business debt advisor team will work through the figures with you. You can do this on the phone or pop into our offices in Manchester if you are local.
Micro Plan
It’s vital your plan includes things you do on a daily basis to make you feel better. You have got to get yourself breathing – long walks, gym work outs, whatever physical exercise you enjoy is crucial. Cut out the alcohol, it makes anxiety so much worse. De-clutter – get your paperwork in order. I recently had an individual come and see us armed with 2 very large bags of unopened mail. We went through the mail, much of which was junk and actually his problem was not half as bad as he thought it was.
There is always a solution
We have a decent rescue culture in UK which can include voluntary arrangements for both businesses and individuals. Your business may be capable of being rescued with a CVA which would allow your company to pay its debt back in affordable monthly instalments over a period of 3 to 5 years.
If your business is not viable, it can be wound up. You could start again with a new company or operate as self employed. If the winding up of the business leaves you with personal debt, this could be dealt with by an Individual Voluntary Arrangement, IVA, which will let you pay back your debt again in monthly instalments.
Taking steps to wind up your company does need careful consideration. Call our team on 0333999689 or email us at advice@thebusinessdebtadvisor.co.uk
The Business Debt Advisor is a trading division of The Debt Advisor Ltd which is authorised and regulated by The Financial Conduct Authority number 659920. Beverley Budsworth is the MD and is also an Insolvency Practitioner regulated by The Insolvency Practitioners Association.
