Many small business directors could be personally liable for company credit card debts if their firm gets into financial trouble, experts have warned. A little-known catch means a personal guarantee attached to a business credit card can leave a director exposed to potentially significant debts.
The warning comes as the number of creditors' voluntary liquidations (CVLs) jumped by almost 9% in July compared with June, according to the latest figures from the Insolvency Service.
Rise in liquidations
Flexible finance, including small business credit cards, remains one of the most commonly used forms of borrowing by UK small and medium-sized businesses. But directors may not realise that a card can carry a personal guarantee, meaning they could be chased personally for the money if the company cannot pay.
This can come as a nasty surprise to business owners who believe their limited company status means their personal finances are protected from company debts.
Directors' warnings
Todd Davison, managing director of Purbeck Insurance Services, said directors need to understand exactly what they are taking on when they sign a guarantee. He said: "The 9% rise in creditors' voluntary liquidations (CVL) in July, from June, is concerning – every CVL is a director who has reached the end of the road and taken the very difficult decision to close down their business. In most cases, the cost of doing business has just become too much, and that decision will ripple through their lives, the people they employ and the communities in which they operate."
He warned that a company entering insolvency does not necessarily wipe out the director's personal liability under a guarantee. "A CVL can also make the director personally liable for any debt their business may owe, if they have given personal guarantees to secure finance, lease premises, or keep suppliers on side while trying to keep the business trading," he said.
Personal guarantee risks
"Insolvency wipes out the company's liability, not the director's – and that includes the personal guarantee behind a business credit card," he added. Mr Davison said the figures should act as a warning to directors who have signed personal guarantees, however small the borrowing may initially have appeared.
Harvey Dhillon, founder and chief executive of Zmartly, said directors should not dismiss a personal guarantee as simply another piece of paperwork. He said: "A personal guarantee is not the small print. It is the reason you were lent the money at all."
He explained that many small companies have little trading history or assets against which lenders can provide credit, making the director's personal guarantee the security for the borrowing. "A guarantee sits outside that cap, because it is a separate promise from you to the lender," he said. "When the company cannot pay, the lender comes to you, and limited liability is no answer."
Mr Dhillon said that, of 1,931 company insolvencies recorded in July, 1,497 were creditors' voluntary liquidations – situations in which directors voluntarily close their companies. That is precisely when a personal guarantee can become a serious financial problem, he warned. He also said directors should consider whether personal guarantee insurance is appropriate, depending on the size of the commitment.
Tony Sanchez, founder of Bridging Loan Directory, admitted he had not realised his own company credit card might carry a personal guarantee. He said: "I have a company credit card, but I was not aware that it might carry a personal guarantee. Like many directors, I assumed the protection provided by operating through a limited company extended to routine card borrowing unless I had knowingly signed a separate guarantee."
For a director facing financial difficulties, the difference between an ordinary company debt and a debt backed by a personal guarantee could ultimately be measured not just in business losses, but in their own personal finances.
