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What is a Personal Guarantee?

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Jan 4, 2023

Fact Checked By:
David Nicholson - Finance Editor

What is a personal guarantee for a loan?

Smaller business owners can get the credit that is otherwise impossible to obtain by signing up for a personal guarantee. A personal guarantee can be risky for business loan guarantors and the company director. Lenders can accept personal guarantees to cover the company’s debts.

A personal guarantee may be required by a lender to ensure that the business owner or company director can make the business finance repayments if the business is unable to do so.

This is something you might not want to do. If you’re willing to accept the company’s financial position, a valid personal guarantee from directors to lenders could make a difference in your ability to get the business financing you need.

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What is a personal guarantee?

A personal guarantee is an agreement between a lender and the owner of a company who promises to be a guarantor on credit given to them.

This means that the lender can hold the owner personally liable for repaying the loan amount using their personal financial assets in the event of default by the business or bankruptcy. Read our guide on personal loans vs business loans for more information on which is best.

A personal guarantee should not be taken lightly. Many business owners will also sign up for what’s often called a “directors guarantee”, as it is the only way to secure the financing they need to grow their business.

A personal guarantee, in simple terms, is an agreement between a business owner, and a loan provider that, if your company is unable or unwilling to make the loan repayments, you, the individual, are personally liable to repay the loan for the business finance.

Although it may sound daunting initially, providing personal guarantees increases your chances of getting business finance. This loan agreement reduces the provider’s risk. This allows the provider to lend more money to businesses than usual as the loan repayment is covered by the owner or company director’s own assets.

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What are the circumstances in which I might need a personal guarantee

Lenders can reduce the risk of lending to businesses by accepting a personal guarantee.

A personal guarantee means lenders might be more willing to extend a loan or to finance a greater amount because they have the ability to call the business owner and ask them to repay the loan.

A personal guarantee can be especially important for helping smaller or newer businesses obtain funding if they are unable to provide the security required by a lender.

If a company’s credit score isn’t good enough to allow them to get a loan, an owner might act as a guarantor. If this is the case they should fix the business credit score to the best score they can achieve.

A personal guarantee may be requested by a lender for business interest in:

  • Business loans
  • Business mortgages
  • Property leases
  • Invoice Financing
  • Asset leases

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Pros and cons of personal guarantees for a company director or business owner

Personal guarantees have some obvious advantages but are also important considerations for company directors and owners.

Personal guarantees have many advantages

  • If your company has poor credit or outstanding debt, it may be able to obtain financing.
  • The guarantee might lead to a lender offering more favourable terms.
  • Funding can help you grow your business and realise its full potential.

Personal guarantees can pose risks

  • Although you may be confident in your ability to repay the loan, it is possible to arrange for a personal guarantee and borrow money.
  • Personal assets cannot be used by creditors to pay business debts unless you are a sole trader or partnership. However, they can be secured with a personal guarantee if the business is unable to pay.
  • Your savings, investments, property, and other assets can all be used as a guarantor for a business loan. This could put your personal finances in serious danger.
  • Personal bankruptcy could occur if your assets are insufficient to pay the company’s debts.

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What length of time does a personal guarantee last?

The personal guarantee lasts for the time stated in the agreement. A personal guarantee should be valid for the specified time. If there is a time limit, the obligation of a business loan guarantor to pay the business’s debts will expire.

These limitations should be discussed and agreed upon when the personal agreement is being drawn up. You can have a solicitor help you negotiate and ensure you fully understand the terms.

Is it possible to limit your liability through a personal guarantee

A personal guarantee may allow you to limit the amount of debt that you are liable for. It is important to determine which loans are covered by the guarantee and what happens to any future credit taken out with the same lender.

It is important to consider all terms and conditions of a guarantee agreement carefully. A solicitor can help you to understand your responsibilities as a guarantor.

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What happens if you fail to meet your personal guarantee?

A personal agreement could allow the lender to claim any assets that were used as collateral. You could face legal action by the lender or even a petition to declare you insolvent or bankrupt if you fail to pay your debts on time.

What is personal guarantee insurance for a business loan?

A business loan guarantor can take out personal guarantee insurance to provide financial protection for their personal wealth in the event that the guarantee is needed. The insurance will not cover the entire guarantee.

The cost of the personal insurance policy for guarantee will depend on the amount of the guarantee and assets used as security.

What is the difference between joint and multiple personal guarantees?

Joint and multiple personal guarantees mean that both personal guarantors, as well as individual guarantors are jointly liable for the entire amount of the debt.

If there were three guarantors for the loan, each would be responsible for the entire amount. If two of the three guarantors failed to pay, the remaining one would be responsible for the entire debt balance.

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What personal guarantees are available to protect my personal property?

Personal guarantees can’t be enforced over principal private residences (ie. loans exceeding £250,000) if you have taken out a loan under the Government’s Recovery Loan Scheme (RLS).

After the proceeds from secured business assets (if applicable), your personal guarantee is limited to 20% of the balance of your Recovery loan.

Lenders can enforce payments of debt against your personal property if you have a business loan. You could also seek a fixed charge to your property to protect the amount owed. A fixed charge can be requested by the court if it is not provided voluntarily.

We will work with you to find the best payment method for you. Once your loan has defaulted, we will only pursue personal guarantees (and possibly enforcement against your personal property).

We want to help as many people as possible, but the information provided here is only for informational purposes. It should not be considered legal or financial advice.

We will not be held responsible for any loss or damage that may result from using or relying on the information here.

Are you able to obtain legal advice before signing a personal guarantee?

Many lenders will require you to seek independent legal advice before you sign a personal guarantee. You can seek professional advice to ensure that you fully understand the terms of the agreement and help you negotiate if necessary.

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