Harper James advises UK businesses on the legal and commercial issues involved in raising finance without requiring founders or directors to give personal guarantees. A personal guarantee makes an individual responsible for a company’s debt if the company defaults, so funding without one limits the risk to the business and its assets, subject to the terms of the relevant agreement.
Equity investment does not normally require a personal guarantee because investors receive shares rather than a promise of repayment. Options include angel investment, venture capital, a private share issue, an advance subscription agreement and, where the conditions are met, SEIS or EIS investment. The trade-off is dilution of existing shareholders’ ownership and the need to agree investor rights, board arrangements, reserved matters, information rights and exit provisions.
Businesses should prepare an accurate cap table, business plan and financial information before approaching investors. The investment documents should define the subscription price, share rights, warranties, conditions to completion and use of funds. A shareholders’ agreement and updated articles of association are often required to record the relationship between the company and its investors.
Asset finance is secured against equipment, vehicles or other business assets, rather than relying primarily on a director’s personal promise. Invoice finance uses unpaid customer invoices as the funding base. Revenue-based finance links repayments to future business revenue, although its cost and repayment profile require careful review. These arrangements can include a debenture, fixed charges, floating charges, financial covenants, minimum repayment obligations or recourse provisions.
The absence of a personal guarantee does not mean the finance is unsecured. A lender can still take control over specified assets or rank ahead of other creditors if the company enters insolvency. Directors should review the security documents, events of default, restrictions on further borrowing and the effect on existing lenders before signing.
Government grants, research funding and local or sector-specific schemes do not usually involve personal guarantees, but they have detailed eligibility, reporting and spending conditions. Equity crowdfunding raises capital from multiple investors and requires appropriate disclosures, shareholder documentation and a workable structure for managing a large shareholder base. Supplier credit, customer deposits and longer payment terms also provide funding without a traditional loan, but the contract should address ownership, delivery, refunds and insolvency risk.
The right option depends on the company’s assets, cash flow, growth plans, ownership objectives and ability to meet repayment obligations. Before accepting terms, the board should compare the total cost of funding, security package, control rights, default consequences and restrictions on future fundraising. Funding documents should also be checked against the company’s articles, existing shareholder agreement and obligations to other creditors.