A few weeks ago I was introduced to a business owner and asked the question I always ask early on: can I have a proper look at the finances?
What I found has stayed with me.
The business had run an invoice finance facility for years. It worked, it was familiar, and it had funded the company through more than one cycle. Then a combination of pressures hit at once – margin, timing, a couple of slow payers – and the owner went looking for a lump of cash.
He was offered a business loan, advertised as unsecured. He signed. Trade didn’t pick up the way management had forecast, so he went back to the market. Two more loans. Both “unsecured”. Both requiring a personal guarantee.
By the time I saw the outgoings, the business was paying £78,000 a month in loan repayments alone. It was behind on its liabilities. And the director had personally guaranteed the lot.
“Unsecured” is a marketing word
This is the part that frustrates me most, because it isn’t a misunderstanding. It’s a framing.
Unsecured means the lender hasn’t taken a charge over a specific business asset. It does not mean nobody is on the hook.
In practice, most of these facilities come with a personal guarantee from the director, and very often a debenture over the company as well. A debenture is a fixed and floating charge across the company’s assets. If a facility carries one, it isn’t unsecured in any meaningful sense – it’s secured on everything the business owns, and the word on the marketing page is doing a lot of work.
That owner didn’t take on three unsecured loans. He took on three secured loans, and the security was ultimately him.
What actually happens when a guarantee is called
There’s a shortcut people use here – “sign a PG and they can take your house” – and it isn’t quite right. The reality is slower, which somehow makes it worse, because it reads as procedure rather than threat.
If the company can’t pay, the lender issues a demand under the guarantee. If you can’t settle it from personal cash, the lender has to sue you personally and obtain judgment. With judgment in hand, it can apply for a charging order over property you own, and in some circumstances apply to enforce that charge through an order for sale. It can also petition for your bankruptcy.
Nobody arrives at the door with a van. What arrives is correspondence, then a court process, then a charge sitting against the equity you’ve spent twenty years building. The debt has followed you home, and it’s patient.
Directors also tend to assume the guarantee dies with the company. It doesn’t. Insolvency ends the company’s liability, not yours – the whole point of the guarantee is that it survives the thing it was guaranteeing.
Three things to check before you sign anything
Most directors read the interest rate and skim the rest. These are the clauses that decide what the deal actually costs you.
Is the guarantee capped, and at what? Many personal guarantees are limited to a specific figure. That figure – not the loan amount – is your exposure. Find it, write it down, and add it to the exposure you already carry from every other facility. Directors routinely know their monthly repayment to the penny and have no idea what their total guaranteed position is.
Does it say “all monies”? This is the clause that catches people. An all-monies guarantee doesn’t cover the facility in front of you – it covers everything you owe that lender, now and in future, including facilities you haven’t taken yet. Sign one, refinance with the same lender two years later, and the old guarantee is still live and now covers the new debt too.
Is there a debenture attached? If there is, the company’s assets are pledged and the “unsecured” label is decoration. It also matters enormously in an insolvency, because it determines who gets paid before the trade creditors you’ve spent years looking after.
Worth knowing too: personal guarantee insurance exists and will typically cover a proportion of the guaranteed sum. It isn’t a cure, but for a director carrying six figures of exposure it’s a conversation worth having.
The part that still bothers me
Here’s what I keep coming back to about that business.
The answer was already sitting inside the company.
It had a live sales ledger and an invoice finance facility that had been quietly doing its job for years. Nobody had looked at whether that facility was still fit for purpose – whether the advance rate was competitive, whether the concentration limits were choking availability, whether a different funder would release materially more cash from the same ledger, whether the debtor book could support a wider asset based lending structure that also drew against stock and plant.
Instead, the business went out and bought three lumps of expensive short-term money and bolted them onto the top, with the director’s home underwriting the lot.
That’s the pattern I see most often. It isn’t stupidity. It’s speed. A loan can be approved in days and requires nobody to look at anything uncomfortable. Restructuring a working capital facility takes a fortnight and requires someone to open the books properly. When you’re worried about payroll, the fast option wins every time – and the fast option is the one being advertised at you.
What a proper review looks like
Before you take on new debt, someone independent should be able to answer four questions about your business:
- What is my total guaranteed exposure across every facility, including the ones I’ve forgotten about?
- How much working capital is actually trapped in my ledger, stock and assets right now?
- Is my existing facility competitive, or have I simply not tested it since I set it up?
- Am I solving a cash flow timing problem or a profitability problem? Because debt only ever fixes the first one, and it makes the second one significantly worse.
If the answer to the last question is profitability, no amount of borrowing will help. It will just add £78,000 a month to a business that already couldn’t cover its costs, and put your house behind it.
At Compare Your Funding we started in invoice finance in 2013 and it’s still where most of our work sits, because it’s the product most often set up once and never reviewed again. We’re independent brokers, we’re NACFB and FIBA members, and we’d rather tell you your existing facility needs renegotiating than sell you a loan you’ll be personally guaranteeing for the next five years.
If you’re carrying personal guarantees you haven’t counted, or you’re being offered “unsecured” money you haven’t read properly, speak to us first.
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Call 0161 871 9840 or email info@compareyourfunding.com.
Related reading: Business funding options explained: which one is right for your business? and How to build a funding strategy that supports long-term business growth.
