Have You Personally Guaranteed Investors’ Money?

As a business director, you understand the risks associated with accepting investors’ money, as well as the impact that contractual repayments can have on your business. This risk is further increased when personal guarantees are involved. Other complex factors can also complicate your situation, such as inter-company loans, cross-corporate guarantees, special purchase vehicles and mergers and acquisitions.  

As you know, there is always risk associated when setting up any new business venture. These ventures may succeed but, they may also fail. Often, due to external factors beyond the control of directors.  

If you find yourself suffering from cash-flow issues, these complex factors can quickly combine to create a fatal situation for your business. In addition to this, you can find yourself personally exposed as a result. 

The important thing to do is to ensure that you are fully in control of the situation. This can be difficult with so many stakeholders, involved all whilst trying to protect other businesses. However, this is possible with the correct professional assistance.   

The Key Issue: Holding Investors At Bay 

In a normal insolvency situation, personal guarantees will be relied upon, allowing for relatively straightforward negotiations with creditors. However, in a situation where investors hold personal guarantees, the process is complicated. Largely for these two reasons: 

1. There are often multiple parties – In order to expand and grow your business, it is more than likely that you received investments from several parties. This makes the management of insolvency very difficult. Instead of dealing with a few predictable banks, you are facing numerous angry investors. If one or two of these investors decide to break away, you could face serious consequences. 

2. They are individuals, not businesses – This sounds obvious but, it makes the process much more unpredictable. Any experienced business owner will know how to deal with creditors. However, investors have their own motivations and desired outcomes. In addition to this, they may also act on an emotive basis rather than a commercial one. This means that they are willing to go further to recover their money from you. This is also why it is so important to utilise impartial advice from representation who can take an objective view.  

These factors mean that you are not facing the fight you may have expected. In most cases, it takes a team of experienced insolvency experts to understand and manage this process. Whilst we understand that you may feel an obligation to pay your investors back, it is vital that you take a commercial approach. Ask yourself the question “Would they do the same for you?” 

What Is At Risk?  

When it comes to a situation involving one, or all of the above, nothing is off the table. Remember, your company does not have to enter insolvency for you to be made personally liable for investments. Investors have the same means to pursue you as any bank and, will not hesitate to do so. This includes legal action, statutory demands and bankruptcy. 

If your company struggles or fails, you will face an avalanche of issues. No matter how good your financial advisors and accountants are, they are rarely experienced in dealing with insolvency. And, once a personal guarantee is ‘called in’ you have a very limited timeframe to take control of the situation.  

Failure to do so puts your finances, your other businesses, your home and your assets on the line. In the worst-case scenario, you could even face bankruptcy and the possibility of being unable to hold company directorship. Although many directors’ largest concern is the impact on their reputation, you can be assured that the long-term financial consequences are even worse. 

Your Options

Mergers and Acquisitions 

If you’re faced with insolvency, you might consider pursuing a merger and acquisition as a potential solution. While the prospect of an influx of capital may seem enticing, it is crucial to remember that the personal guarantees you signed with investors will not automatically transfer to the acquiring party.  

The main result of selling your business is that you will lose control over the business and its future. This means that these personal guarantees could be enforced at any point. This places you in an extremely vulnerable position, with the potential of being pursued personally and it being entirely beyond your control. 

Alternative Finance? 

While seeking alternate finance can offer short-term relief or assist in achieving specific business objectives, it’s essential to recognise that it does not eliminate the underlying debt. Taking on additional debt without a clear strategy for improving the financial situation of the business can result in a cycle of mounting debt and increased financial strain.  

Moreover, it is unlikely that you will be able to secure sufficient financing without a Personal Guarantee, which, in turn, exposes you to greater personal vulnerability. It is crucial to approach this decision with careful consideration, considering how to best protect your other businesses, your home and your assets.  

More: See How We Recently Protected 3 Directors from Aggressive Investors