The Value Of Personal Guarantees In Credit Management

Credit managers often seek personal guarantees (PGs) from directors to support credit extended to limited companies. These PGs serve as a commitment to pay any money owed, providing reassurance to lenders and suppliers. However, it’s important to understand the limitations of personal guarantees and how much protection they provide.

Although PGs are a contractual commitment, people often view them as mere statements of assurance and cannot always rely on them. They rely on limited information about a director’s wealth. Even with a PG, there’s no guarantee that you will get back the money you are owed.

Risk of PG Stacking

One risk factor is PG stacking, where directors provide multiple PGs. If their personal assets are not sufficient to cover the debts, the value of the PGs diminishes. Having a personal guarantee doesn’t give you any advantage as a creditor, no matter if you got it first or last.

Recent data indicates that directors’ concern about the risk of calls being made on their PGs has increased. Demand for insurance cover to protect directors from claims against their personal wealth has increased. There is also an increased volume of PGs in circulation.

Managing Changing Risk Profiles

When managing multiple credit lines, it’s important for credit managers to stay alert to any signs of a customer’s changing risk profile. Regular communication and sector-specific market intelligence can help identify potential issues early on. However, there is not always transparency in a director’s finances. If a director’s company were to fail, their personal financial circumstances are likely to deteriorate as well.

To assess the value of seeking a PG or evaluating an existing one, credit managers can take certain steps. Paying a small fee to search the land registry can verify if the director owns a property. This can give confidence in an asset that might be trusted in the future. A PG backed up by a charge over a property is generally considered a stronger form of assurance.

Other steps could include requesting HMRC and payroll information from the director. However, these measures do not address the issue of whether the PG is one among many.

Before considering making a call on a guarantor to enforce payment under a PG, it’s important to understand the terms of the PG, whether it is unlimited or limited to a specific amount. Failing to make a payment under the terms of the PG could lead to a petition for an individual’s bankruptcy. Seek legal advice before proceeding, as a PG should only be provided by a competent person. Consider initiating bankruptcy proceedings against an individual who is putting assets beyond the reach of creditors.

Calls for Protection and Government Action

The credit management industry has been calling for protection against the misuse of PGs. 

There have been proposals to establish a register and make PGs a matter of public record. However, the UK Government will ultimately need to decide on the appropriate action. 

For now, credit managers must remain vigilant while we wait for a resolution, as we could be faced with many worthless PGs.

Contact Us for Credit Management Assistance

If you need help with credit management or debt collection, contact our professional, diplomatic team at Jacksons CRS. Call 01603 319034 or email info@jacksonscrs.co.uk for a free no obligation chat about your needs and how we can help.