It is reported in the Examiner today that DFI consulting will be acting as a broker in offering Personal Guarantee Insurance for the first time in Ireland. This is a tremendous idea. Before the bust it was common practice for banks to insist on getting Personal Guarantees for all types of lending to business people. The thinking behind this is clear. Should the business fail and the company is wound up the bank can still go after your personal assets. Before the crash not many business people gave much thought to these Personal Guarantees. It was accepted that if you wanted the banks money then you would have to abide by their rules. So even if the deal stacked up on its own merits the bank would still insist on this safeguard as they saw it. We have all seen many business people brought down by this instrument throughout the bust. One only has to look at the fate of Sir Tony O’Reilly to appreciate the risk you are running when you sign up to such a Guarantee.
The basic tenet of Company Law is that you are operating a separate legal entity from yourself. One of the reasons you would do this is to enjoy the protection afforded to you should things go wrong. In a wind up scenario the debts of the business should die with the business. However, generally speaking the biggest creditor would be the banks and they would always prefer that you put your own assets on the line. Post crash things aren’t much different. Of the deals that are coming before me the Personal Guarantee is very much part and parcel of the loan. That’s why this insurance to my mind is an excellent idea. It seems it may be expensive – €3000 on a €100,000 loan but really the piece of mind this product will give you is money well spent in my opinion.
Another thing to watch for when negotiating a commercial loan are the dreaded words “joint and several”. If you are borrowing in a group and these words are there it means you are individually responsible for the full amount of the loan. Think about that. Borrowers have been caught out where even though they could service their side of a loan but because their buddies could not then they had to stump up their buddies side of the house as well. Not nice, believe me.
Finally, a word on “non-recourse”. If you are smart you will only always ever get the bank to be able to seize the asset that you are buying in the event of default. Easier said than done!
Shane Healy, Commercial Department