Every business needs a little financial boost from time to time, especially in its early days or in time of growth. Today’s financial market offers a wide range of funding types for businesses, depending on how much is needed over what period and for what purpose. Of course, the first thing any lender needs to assess is risk. The greater the confidence that they will get their money back, the better the deal they will be able to offer. Typically, this involves some form of security.
What is a personal guarantee?
It’s common practise for lenders to require personal guarantees when lending to Limited Companies. A Limited Company is a separate legal entity to the owner or director, and lenders prefer to have recourse to the individuals behind the company. It’s often the case that individuals are more reliable than companies in paying back debts, so you can see why lenders want the individual on the hook.
A personal guarantee is normally signed by a director, is for a specific amount, and gives the lender the legal right to require the individual to repay the debt should the Limited Company be unable to do so. Sole traders and partnerships will automatically be personally liable for any borrowing as they trade in their personal names, and so personal guarantees are non-applicable.
Business finance without personal guarantees
You might feel that the only finance offers on the table require a personal guarantee. It’s a path that many business owners go down, but what if you’d prefer to keep business and personal finance separate? If you’d rather not put your personal savings or the family home on the line, nobody can blame you. Most of the time lenders will want to take a personal guarantee. But there are still options available to get business finance without a personal guarantee in the right circumstances. They broadly fall into the following categories:
- Business loans without a personal guarantee
- Invoice finance without a personal guarantee
- Trade finance (also known as purchase order finance) without a personal guarantee
Apply for Business Finance
Apply in 3 minutes. Talk to one of our Business Finance Specialists. Get expert guidance on finance options without personal guarantees.
Do I qualify for a business loan without a personal guarantee?
It will all come down to choosing the right type of finance, but also having your business in a financially strong position. Lenders will take a personal guarantee as a backstop if your business doesn’t have a long track record, doesn’t have significant value in the balance sheet or doesn’t have really clear, predicatble income streams. However, if there is tangible value within your business’s balance sheet then there is good reason to negotiate an agreement without the need for personal guarantees. A debenture on an asset-rich company should give lenders enough comfort.
Typically a business with tangible property assets, a strong and diverse sales ledger or strong stock levels would be in a good position to negotiate on the security package. A tangible net worth of a £200,000 or more is a good starting point to have these conversations. Combine that with a strong track record and predicatble income streams and your expectations should increase.
Business loans without a personal guarantee
Suppose you need a significant lump sum of £50,000 or more, perhaps to invest in new plant, equipment or building upgrades. A business loan is the logical choice, and while many require a personal guarantee, this is not always the case. If your enterprise is a limited company and turns over at least £500,000 per year, there are lenders who may be prepared to accept either a charge over company assets or a debenture, which is a form of charge over the company itself. To convince a lender, your business would need a tangible net worth probably above £200,000.
Can I get a business loan without a personal guarantee?
To be considered for this type of loan, your business needs at least two years of trading history and solid financial standing, with profitable performance and positive trends. The lender will also look closely at the credit history of both the company and its directors.
Benefits of a business loan
Business loans are the most common form of business finance. They’re simple to understand – you get a lump of cash up front to invest in the business, then you have set repayments over a pre-agreed term. This makes it easy to budget. They can be fairly simple to arrange if you know which provider to use.
Invoice finance without a personal guarantee
If your customers are other businesses, and you give them payment terms, then you may be eligible for invoice finance. This type of working capital finance can present an elegant solution that often does not require a personal guarantee. Slow payers are often the bane of a small business’s existence. Running out of cash can have catastrophic consequences. It’s the primary reason that successful businesses with full order books can go under.
When you use invoice finance whenever you invoice a client, the lender can pay a percentage (typically 80-85%) of the amount to you instantly. When the client settles the invoice, you get the balance, minus the lender’s fees.
Personal Guarantee Insurance
If you have to give a personal guarantee have you considered Personal Guarantee Insurance to minimize the risk?
Can I get invoice finance without a personal guarantee?
Invoice finance providers will always take a charge over your company’s debtor book in order to provide credit. If the overall business strength is good – profitable, positive balance sheet and a spread of strong debtors – then it is often reasonable to expect to avoid the need to provide a personal guarantee. Sometimes a lender may require a small personal guarantee – say 10% or 20% of the facility limit. To be in a strong negotiating position your business would need a tangible net worth probably above £200,000.
Benefits of invoice finance
Invoice finance unlocks cash tied up in outstanding invoices that are owed to you. Your business’s main asset may well be your debtor book (outstanding invoices), so leveraging this through invoice finance can be a smart way to access finance. It’s a tailored type of finance, with a credit limit that is proportionate to your revenues. The more you invoice, the more credit you can access.
Trade finance without a personal guarantee
Trade finance provides up front capital to pay suppliers based on orders that your wholesale clients will pay for at a future date. Ordinarily trade finance hinges on having confirmed orders from your clients. So if you have a purchase order from a customer, for example, trade finance can be used to front the cost of the stock and production costs and deliver it to the customer. That’s why trade finance is sometimes referred to as “purchase order finance”. This type of funding often goes hand in hand with invoice finance, which then looks something like this:
- Purchase order received from your client for your product
- You place an order with your supplier
- Trade finance lender pays your supplier when the stock is ready to be shipped
- You receive stock and sell onwards to your client
- On raising your invoice your invoice finance facility kicks in and repays the outstanding trade finance
- Your client pays your invoice, paying off the outstanding invoice finance borrowing
Can I get trade finance without a personal guarantee?
Trade finance is typically provided on the strength of your clients and your suppliers. Lenders like to see a purchase order from a good client, a supplier with a decent credit rating and a track record that your business is able to deliver these transactions. They also like to see a healthy balance sheet to show that you can function well. In this respect lenders typically don’t seek personal guarantees, as they are hanging their hat on your business’s ability to complete the transaction, not your personal assets.
Benefits of trade finance
Trade finance is another source of credit to improve your business’s working capital. It gives you up to 150 days’ credit during which time you can receive stock and sell it onwards. This saves you tying up your own cash in the cycle. Trade finance also works a dream with invoice finance. Trade finance funds the purchase of stock up until the point of sale. Invoice finance then steps in once the sale has been made, funding the period until your client pays.
How else can I raise funding without a personal guarantee?
So, you’ve looked at borrowing from banks but can’t find a way to borrow without giving a personal guarantee? There are some other ways to achieve the same end goal of raising capital. Here are a few thoughts:
- Find investors – you may have to give away part of your future returns and you will need to have a solid business plan in place to be seriously considered as a worthwhile investment. Check out UK Business Angels Association.
- Apply for a government grant – you’re not guaranteed to get anything, and it may not be the amount you want. But if you can get your hands on a grant it could really help. Here’s the government website for more info.
- Use savings – it’s a big personal risk, and you’ll have limited resources. However, there’s no strict repayments required, which is a big plus.
- Borrow money from family – likely to have low interest rates if any at all. Be aware of the potential for it to cause issues if the business fails.
Want some advice?
Talk to one of our Business Finance Specialists. We’re on hand to take you through the options available.