No-deal Brexit could increase demand for business loans

Business groups are concerned that there could be an upsurge in borrowing demands from small firms if the UK exits the European Union with no deal and if there is, the owners are likely to be asked to sign a personal guarantee.

Many business owners have not taken out a loan before so may not be aware that most lenders make it a condition of their support that the borrower provides a signed, written personal guarantee as part of any security arrangements.

This is to protect the lender in the event that the firm becomes insolvent and is unable to meet its financial obligations. If a personal guarantee has been signed, then the director or owner is personally liable for the debt.

It is therefore not a commitment that should be taken lightly, and business owners should fully consider their options and the risks involved, particularly in the current economic climate.

Ideally, the firm’s directors should take independent advice and ensure that they have fully investigated what alternative funding may be available. Then, if a personal guarantee-backed business loan is the right solution, they should ensure that they are comfortable with all the terms of the guarantee.

Amongst the things to check is to how the lender will enforce the guarantee and whether they can serve notice on the business or seek payment on demand. The business owner should also make sure they know what a ‘default’ actually means and whether the terms of the contract allow for any remedy period upon default.

As one industry commentator pointed out, it is essential for business owners to remember that a personal guarantee is not a hypothetical assurance, as creditors can and do enforce them.

Nigel Fry, Partner at Milsted Langdon, said: “It is important for directors and owners to carefully consider taking out a loan before they sign a personal guarantee, as there are terms within the agreement that shouldn’t be taken lightly.”

“If you are small business owner and would like more information on how funding will affect you post Brexit, then please don’t hesitate to get in touch.”

For more information about how Milsted Langdon can help, please contact Nigel at nfry@milstedlangdon.co.uk or by calling 01823 445 566.

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