Personal Guarantees are a safety net for lenders – but are they really necessary if the development project is deemed viable by both the customer and the lender, and the projected profits are realistic and attainable?
Entering into a personal guarantee by a company director to give credence to a project can be a very big commitment. The developer has to contribute a minimum (and often substantial) chunk of money towards the scheme to satisfy the lenders funding policy, so why should they be expected to put their personal assets on the line as well?
If problems do arise, they may be out of the control of the guarantor and, through no fault of their own, the guarantor could become liable for paying back the lender and the project itself may not even complete. A developer must be willing to “guarantee” their own performance, but they certainly can’t guarantee the market, and sales might not happen as anticipated. For these reasons it’s important to think carefully before embarking on a development where the lender is offering funding, sometimes on more favourable terms, if a personal guarantee required.
At Positive Commercial Finance we believe a better methodology is to ensure that the customer is capable of delivering the project and that the development has a well thought out and thoroughly considered business plan. If the project is clearly viable and the customer has previous experience of managing and completing similar projects, then should there really be a need for PG’s?.
Personal Guarantee Insurance is now also an option for developers wanting to minimise their exposure. Such insurance policies are there solely to protect to policy holder, and not the lender.
We work closely with developers to assess their project and their goals, looking at the projected returns for the project against their cash input, the Loan To Value risk, and future equity and likely liquidity as the project progresses. As part of this due diligence into the project, we can consider similar projects in the area and local demand for sales and rental values.
After doing this we can approach our extensive panel of lenders that can then underwrite the case without the need for personal guarantees, meaning the application process is simplified and funding can be agreed and released quicker.
When sourcing funding, it’s clear that there are alternative means out there, and working with experienced brokers and lenders could mean that personal guarantees become less of a worry.