Being asked by your lender to provide a personal guarantee can be daunting. Suddenly all your personal assets are now on the line, your house, car and savings could be in jeopardy if the guarantee was to be called.
To mitigate this risk you can now take out an insurance policy that will pay out in the event that the guarantee is called.
The premium on the policy is 3% of the amount being guaranteed plus a small arrangement fee.
For that you get the following % of your liability covered:
So let's take an example. Company A borrow's €100,000 to buy machinery. The loan is to be repaid over 5 years. The Director of the company is asked to provide a personal guarantee for the borrowing. Reluctantly the guarantee is provided.
To mitigate the downside if the guarantee is called the Director purchases an Insurance policy. The cost of the premium is 3% of the total guaranteed, so €3,000. There is also an admin fee of €200.
For this after 3 months the guarantee is insured as per the table above. So say in the middle of year 3 the guarantee is called? The insurance policy will pay out 70% of the guarantee i.e. €70,000. Depending on how much of the loan has been repaid this could discharge the Directors liability in full.
Under the terms of the policy you are required to notify the helpdesk if any of the following occur in your business:
- A judgement against the business or any other legal action taken to wind up or place the business into administration or recievership.
- Demand for repayment of loans (secured or unsecured)
- An inability to make tax repayments as they are due.
- Any Tax or VAT demand received.
- The business is insolvency (cannot meet its obligations as they fall due).
- Any legal action (employment law, health & safety etc) that could lead to a material monetary expenditure of the business which has not been reserved for.
- Impending redundancies.