Updated: 8th January 2020
When making a personal guarantee for your company’s debts, it is easy to overlook the potential consequences should the business default on its liabilities. Maybe you felt certain that the company’s future was strong, or you were just trying to set up the business as quickly as possible, but if your company can no longer afford the rental payments on its business premises, your home or other personal assets could now be at risk.
All it takes is a sudden downturn in the market or loss of a key customer to instantly change your company’s fortunes – hopefully not also extending to your personal finances. But before reviewing your options in these circumstances, let’s look at why commercial landlords would require a personal guarantee in the first place.
As with residential rentals, landlords need to satisfy themselves that their tenants will be able to cover their rent payments for the duration of the lease. In the case of a commercial property this is often a period of years, rather than months, making it all the more important for the landlord to undertake strict diligence measures before allowing your company to take it on.
This is understandable as far as the landlord is concerned. They are undertaking considerable risk, so if a problem with the company’s credit rating arises for any reason, it is highly likely you, as a director of the company, will be asked for a personal guarantee.
Although taking out a long-term lease on business premises may be unavoidable, you should carefully weigh up the likelihood of issues arising over the company’s credit rating. This will at least alert you to the possibility of being asked to provide a personal guarantee.
If the worst has happened and you cannot afford the rent on your business premises, what are the options?
Even if the outlook seems bleak there are a variety of options which could provide the breathing space needed to get the company back on its feet, negating the need for the landlord to call in your personal guarantee.
A Company Voluntary Arrangement would consolidate this and other business debts down to a single monthly payment. It stops all creditor legal action against your company as long as the terms of the CVA are met.
You will need to appoint a licensed Insolvency Practitioner to begin negotiations with your creditors, and if agreement is reached, your IP will set up and administer the CVA. Creditors are more likely to negotiate with, and respect the views of a professional adviser on whether the company will keep up these payments, which would increase your chances of a successful outcome.
Begbies Traynor has negotiated many CVAs on behalf of distressed companies, and understand the viewpoints of both sides. We help to instil confidence in your company’s ability to repay by providing a professional view of your current financial standing, and conveying this to your creditors in an unbiased way.
A range of financing options may be suitable in these circumstances, including invoice factoring and discounting, fixed term business loans, and asset-based lending. One or more of these could provide the quick injection of cash that gets your company on a better financial footing and avoids further default on your rental payments.
Invoice factoring is a form of asset-based lending whereby you essentially ‘sell’ your sales ledger to a factoring company which pays a large proportion of what is owed to you in advance.
Other forms of asset-based lending may also be suitable if you have company assets which could be leveraged to inject cash quickly back into the company.
Company Administration may be an option if your landlord is not prepared to negotiate on repayments, or you are worried about accusations of wrongful trading. With potential for a company restructure, Administration halts any legal processes taken against your firm and allows the time needed to turn the company’s fortunes around.
Pre-pack Administration means that the underlying business is sold as a going concern, either to the existing directors who go on to form a ‘newco,’ or to third party trade buyers. Marketing of the business takes place before the Administrators are appointed in this instance, with sale being completed soon after.
Begbies Traynor is licensed to negotiate on your behalf with commercial landlords. As the UK’s leading insolvency practice we have a long history of successful results, and an extensive UK office network, our experts are available for a same-day consultation free of charge.