If you’re looking to take out finance for your business, many lenders will ask you for a personal guarantee. This means you act as guarantor for your business’s debt. A personal guarantee can help you access more finance options as it reduces risk for the lender, but it also means that you’re personally liable if your business can’t repay the loan.

Taking on this kind of obligation can seriously impact your own personal finances, credit score and ability to borrow in future, so it’s essential to understand  how personal guarantees work before you sign one. Here we’ll explain the steps you should take before signing one and alternative options that might be available to you. 

What is a personal guarantee?

A personal guarantee is a promise made between a business owner or executive and a lender. This agreement is legally binding and states that you as the owner of the business will be personally responsible for repaying the debt if the business either defaults on payments or faces insolvency.

A guarantee can be for the full value of the loan or just a percentage (as little as 20%), providing an extra level of security for the lender – meaning they may be more willing to issue credit with a back up plan in place, in case the company goes insolvent.

When would I need a personal guarantee?

A personal guarantee is a form of collateral for the lender and is usually required for unsecured business loans. The personal guarantee takes the place of assets to ensure that the lender can recoup the debt if needed.

Some of the most common scenarios where a lender may request a personal guarantee include:

• Small business loans
• Invoice finance agreements
• Asset leasing arrangements
• Mortgages
• Property leases

What are the advantages of a personal guarantee?

Agreeing to a personal guarantee is a serious decision to make but it can also bring opportunities which may have previously been out of reach.

Better chance of getting funds

By committing to a personal guarantee, you’re offering more security to the lender. This could be the incentive they need to lend you money and be the difference between accessing credit or not.

Improved lending terms

By reducing the risk for the lender and agreeing to guarantee the debt, you may be able to access better terms for the loan, such as a lower interest rate or a higher credit threshold.

Achieve your business goals

Signing a personal guarantee can help get the money you need to support your goals, such as your next stage of growth. If you’re being turned down elsewhere, this could be one of the few ways to help realise your business’ potential.

Personal guarantees on business loans

Small businesses are riskier to lend to, and as a result may find it difficult to get an unsecured business loan.  However, by agreeing to a personal guarantee, you could be improving your chances, as it’s an extra layer of reassurance for the lender that the debt will be repaid.

Just like a standard business loan, the business will need to pay it off. But, if this falls through, the individual will be responsible for paying up.

What are the disadvantages of a personal guarantee?

Understanding the potential consequences should also form a big part of your decision-making so you can decide whether it’s worth it.

Future uncertainty

Even if you’re confident your business will be able to keep up with the repayments, things may not work out that way. In business, the unexpected can happen, and with little warning.

It’s a personal burden

If your company becomes insolvent, it will be your responsibility to step up and make the repayments yourself. And if you’re not in a situation to comfortably do so, this can result in long-lasting financial problems, such as bankruptcy.

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What to consider before agreeing to a personal guarantee

Before committing to a personal guarantee, it’s essential to thoroughly evaluate several critical factors to ensure you fully understand the implications and risks involved.

1. Understand the terms and conditions

• Scope of Liability: Determine the extent of your liability. Is it capped at a certain amount, or is it unlimited?
• Duration of Guarantee: Know the length of time you will be liable. Does the guarantee end once the loan is repaid, or does it extend beyond that period?
• Conditions for Enforcement: Understand the specific conditions under which the lender can enforce the guarantee. What constitutes a default, and what are the timelines for enforcement?

2. Check your risk level

• Current Financial Standing: Evaluate your personal financial situation, including assets, liabilities, income, and expenses. Consider how taking on potential business debt might impact your financial stability.
• Risk Tolerance: Reflect on your willingness and ability to take on personal financial risk. Would you be able to handle the financial burden if the business fails?

3. Seek Legal and Financial Advice

• Consult Professionals: Engage with a legal advisor to review the guarantee agreement. A financial advisor can help you understand the broader impact on your personal finances and review your ability to pay.
• Independent Advice: Ensure the advice you receive is independent and not influenced by the lender or other interested parties.

4. Consider Personal Guarantee Insurance

• Insurance Coverage: Look into personal guarantee insurance, which can protect your personal assets if the business defaults. Understand what percentage of the debt is covered and the terms of the policy.
• Cost vs. Benefit: Weigh the cost of the insurance premiums against the protection it offers to determine if it’s a worthwhile investment.

5. Explore Alternative Financing Options

• Secured Loans: Investigate other financing options that might not require a personal guarantee, such as secured loans that use business assets as collateral.
• Asset Finance: Borrowing based on the value of physical assets that you either possess or wish to purchase, guaranteed by the equipment itself.
• Invoice Finance: Financing a percentage your outstanding (unpaid) invoices to get part of their value now and the remaining once they’re paid, minus the lender's fee and interest.
• Small Business Grants 

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How to negotiate a personal guarantee

While personal guarantee terms are largely set by the lender, there is scope for negotiation if you’re keeping up your end of the deal. After all, the guarantee is meant to reduce risk for the lender - if you can show that you’re a reliable customer, they may amend the guarantee. 

For example, you can negotiate to end the guarantee sooner than the term of the loan if you keep up payments consistently or overpay on payments.

Directors guarantee vs Personal guarantee

A personal guarantee by a director means that the director of a company is personally liable to repay the debt when their business is unable to.

For a company director to enter this agreement, it usually indicates that they have great confidence in their business. Despite agreeing to be personally responsible, they will assume that they will never actually need to use their own personal assets to repay a loan.

But even if you have confidence in your business, agreeing to a personal guarantee is a significant decision which should never be made lightly. After all, most businesses are affected by unexpected peaks and troughs, so there will always be a chance (even if it is small) that repayments need to default to the guarantor and their personal capital.

This method, however, can help to unlock funds which may otherwise be unattainable. But to access it, you risk blurring the lines between personal finance and business finance – something which most would prefer to keep separate.

Personal guarantees FAQs

Is a personal guarantee legally binding?

Yes – as soon as a personal guarantee is in writing and signed by the guarantor, then it becomes an enforceable contract.

In the event of a company’s insolvency, the individual will be given a timeframe to pay the outstanding payment. If this isn’t met, then there may be legal proceedings against you.

How long does a personal guarantee last?

As long as stated in the contract. It may also become unenforceable after a limitation period, after which the creditor won’t be able to claim. But again, this will be dependent on the contract.

Every personal guarantee is different – so it really is important to make sure you understand the agreement and get legal advice before signing on the dotted line.

Are business credit cards personally guaranteed?

When taking out a business credit card, you may be asked to sign a personal guarantee. This will particularly be the case for small businesses, as the credit card issuer is taking more of a risk.

However, this won’t be the case every time. There are no-personal-guarantee business credit cards available, so it would be worth doing your research.

Does a personal guarantee affect credit?

Signing a personal guarantee shouldn’t affect your personal credit if all the repayments are made on time. However, this might not be the case if your business falls behind on the repayments. In this situation, you’d be liable to pay the debt. This could result in a loss of savings, loss of your home and your bank accounts being frozen. If these personal assets aren’t enough to cover the outstanding debt, you may be made bankrupt, which would of course negatively impact your credit rating.