Non share holding director asked to be a Personal guarantor on a Loan - Help with my next steps

[Fraser41]

Hi,

I am non share holding director of an SME. I have been asked by one of the shareholders to sign as a PG on A loan. For context, there are 2 shareholders. One is retired so is not signing as a PG. I have a locked price on 20% of his shares and I have 3 years to buy them. I can do this using company profits but we have had a couple of tough months. So we need a loan to support the business.

I also have personal debt linked to company expenses on my personal credit card that have not yet been claimed.

I feel I am taking on a lot of risk but not getting the reward. I am the only active working director in the UK with the other working director working remotely.

I am paid a salary of course however I am not sure about the increased risks

I am confident we can turn around the business however I am taking in risk with the share buy agreement running out before the loan payments will be finished.

What are my options and is there anything I can do to help protect me or help me secure my shares. Is a management buy out as part of the loan be something to approach.

I also want to know more about Sweat equity and if I have this as an option

 

[fisicx]

Directors don’t take a salary. Employees get the salary. The two roles are independent of each other as are shareholders.

Why can’t the other shareholder or the retired shareholder sign the PG? If you are confident the business will pull through there is no risk to either person.

 

[Mark T Jones]

Personally I'd run a mile - as a finance broker I wouldn't touch the deal either - trying to borrow your way out of trouble is a recipe for disaster. Every plant that tries it is convinced they can turn things around within 6 months. - few do.

Add to that the apparent lack of trust or empathy between you - take a huge step back and take a cold, hard look at the situation.

 

[Fraser41]

Directors don’t take a salary. Employees get the salary. The two roles are independent of each other as are shareholders.

Why can’t the other shareholder or the retired shareholder sign the PG? If you are confident the business will pull through there is no risk to either person.

Hi - thanks for the advise but I disagree. I am a director but also an employee of the business. As I am not a shareholder dividends is not a definite. I do appreciate the advice on the risk but

 

[Fraser41]

Personally I'd run a mile - as a finance broker I wouldn't touch the deal either - trying to borrow your way out of trouble is a recipe for disaster. Every plant that tries it is convinced they can turn things around within 6 months. - few do.

Add to that the apparent lack of trust or empathy between you - take a huge step back and take a cold, hard look at the situation.

Thanks Mark

 

[fisicx]

Hi - thanks for the advise but I disagree. I am a director but also an employee of the business. As I am not a shareholder dividends is not a definite. I do appreciate the advice on the risk but

You are a director and an employee. You can be either or both. It means for example you can resign as a director and still be an employee or terminated as an employee and still be a director. This isn't just semantics, there is a clear legal separation of the two.

Signing the PG as a director doesn't have any bearing on your employee status except to make you more vulnerable.

But back to your question: Why can't the two shareholders sign the PG? You have no skin in the game except your wages. What benefits do you get by being a director?

 

[Socio South West]

.....company expenses on my personal credit card that have not yet been claimed.....

There's enough in that line that in conjunction with needing a loan to support the business it is abundantly clear some pretty decisive action is needed to understand why/how this situation has arisen and how you move forward to get out of it before you commit to a loan. " I am confident....." is not good enough in this situation.

However, the Personal Guarentee at the end of the day only allows the Bank to get its money back after all the Company assets have been liquidated: How asset rich is the company?
You have hopefully been offered a better interest rate with a Personal Guarentee in place?

Is there scope - bearing in mind the current obvious trading difficulties - to get a new director/shareholder on board who would introduce capital?

 

[Mark T Jones]

You have hopefully been offered a better interest rate with a Personal Guarentee in place?

I can answer that one for you. They have been offered a loan with PGs and no loan without them.

Two-tier pricing is extremely rare. There are lenders who lend to prime credits at prime rates and lenders who lend to marginal credits at higher rates (sometimes they are the same lender under different banners). Given the circumstances this isn't, by definition, a prime credit.

 

[Lisa Thomas]

I would run a mile. I see directors PG's being called in when the company goes under far too often. Why take the risk?

 

[Porky]

We don’t know if there is any actual asset value in this business. What I mean is if things went tits up, could what’s left, any buildings stocks assets etc be sold that would give a greater value than the loan money?

Trying to establish the risk between how big the loan is and the value of the business - how big a risk is this?

That being said, the PG should come from the majority shareholder really anyhow. I do wonder why the majority shareholder won’t PG it if the business is so great?

 

[Newchodge]

Hi - thanks for the advise but I disagree. I am a director but also an employee of the business. As I am not a shareholder dividends is not a definite. I do appreciate the advice on the risk but

I think @fisicx phrased it badly. You reveive a salary as an employee. Separately you may receive payment as a Director. But the 2 roles are separate.

How much is the loan for?

I would consider agreeing in return for a reasonable % of the shares now, not as an option.