Personal guarantees explained

If you are a director applying for business finance, there is a good chance the lender will ask for a personal guarantee. It is a serious commitment, and it is worth understanding exactly what you are signing. This guide explains what a personal guarantee is, why lenders ask for one and how to manage the risk.

What is a personal guarantee?

A personal guarantee (PG) is a promise by an individual, usually a director or shareholder, to repay a business debt if the company cannot. A limited company is a separate legal entity, so normally its debts are not yours personally. A PG changes that for the specific debt it covers.

If the company defaults, the lender can ask the guarantor to pay. If the guarantor does not pay, the lender can take legal action, which in serious cases can put personal assets, including your home, at risk.

Why lenders ask for one

For unsecured lending, the lender has no specific asset to fall back on. A personal guarantee gives it extra comfort that the people running the business are committed to it. Most unsecured business lenders in the UK ask for one, and many asset and invoice finance providers do too.

Types of guarantee

• Unlimited: covers the full debt, plus interest and costs.
• Limited: capped at a set amount or percentage of the debt.
• Joint and several: where there are several guarantors, the lender can pursue any one of them for the full amount, not just their share. This is common, and important to understand.

Some guarantees are also "all monies", covering any debt the company owes that lender, not just the specific loan. Check the wording.

Before you sign

• Read it in full and ask the lender to explain anything unclear.
• Take independent legal advice. Many lenders require it, or ask you to confirm you have had the chance to.
• Know the maximum you could owe, including interest and enforcement costs.
• Check whether it is limited, joint and several, or all monies.
• Ask what happens when the loan is repaid. A guarantee should end or be released when the debt is cleared, but confirm this in writing.
• Talk to your family if shared assets could be affected.

Can you negotiate?

Sometimes. Depending on the lender and the strength of the business, you may be able to:

• Limit the guarantee to a percentage of the debt.
• Cap the amount.
• Have it reduce as the loan is repaid.
• Avoid a charge over your home.

A broker can help by approaching lenders whose terms suit you.

Personal guarantee insurance

Personal guarantee insurance can cover part of what you would owe under a guarantee if a lender calls it in. Policies vary in the percentage covered, waiting periods before cover starts, and exclusions. It does not stop you being liable, but it can soften the impact.

We can make insurance introductions. See the personal guarantee insurance section on our home page for more.

If things go wrong

If your business is struggling to repay, speak to the lender early. Lenders generally prefer to agree a plan rather than call in a guarantee. If insolvency is a possibility, take professional advice from an accountant or a licensed insolvency practitioner as soon as you can.

A simple example

Two directors guarantee a £100,000 company loan on a joint and several basis. The business later struggles, and £60,000 remains unpaid. The lender can ask either director for the full £60,000, not £30,000 each. If one director has no assets, the other could end up paying it all and would then have to try to recover a share from their co-director.

If the same guarantee had been limited to 50% of the loan, each director's maximum exposure would be capped at £50,000. That is why the wording matters so much, and why independent advice before signing is so important.

Next steps

Personal guarantees are a normal part of business borrowing, but they should never be signed without understanding them. When you run a quote, your relationship manager can tell you which options are likely to need one. Figures are indicative only and subject to lender assessment and approval.