Personal guarantees explained

When applying for a business loan, providing a personal guarantee can mean the difference between a lender saying ‘yes’ and ‘no’. Almost every business lender that offers unsecured loans requires a personal guarantee, including us, so it’s a good idea to understand the advantages and risks involved.

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In day-to-day business, if you tell a client or customer that you ‘personally guarantee’ a product or service will be delivered on time and at a certain cost, they’ll probably take the statement to mean that you have every intention to live up to your promise. But when taking out a business loan, providing a personal guarantee has a far stronger meaning. It’s a legal agreement that says you’ll personally cover all amounts due under the loan if your company isn’t able to repay it. If you didn’t know this, you aren’t alone. In 2016, one in five SME said they thought a personal guarantee was a just commitment to make repayments to the best of their ability, and more than half didn’t understand personal guarantees in detail.

To help up you understand the ins and outs of personal guarantees, we’ve summed up the key facts you need to know before signing on the dotted line.

Most loans require some form of security

The two main types of business loan are secured and unsecured. Secured loans are tied to specific assets, such as company property, land or equipment, which are assessed through valuations. If the loan isn’t repaid, the lender can recover the cost by selling the secured asset(s).

Signing a personal guarantee to say you’ll cover the cost of a loan might sound very similar to securing it against an asset. In both cases, you have a type of personal liability. However, secured loans can come with more complexity than unsecured loans. Valuations of the secured assets can take a while to process, there could be other lengthy legal checks, and if you’ve repaid part of the loan at the time you default, the whole asset could still be seized.

With unsecured borrowing, there’s no specific asset used as security. Instead, lenders look at your company’s trading position, credit rating and financial history to assess the likelihood of being repaid in full and on time. In most cases, even if your company is in good financial shape, lenders of unsecured loans require a personal guarantee.

How common are personal guarantees among High Street and alternative lenders?

We checked the terms of 26 High Street banks and alternative lenders who offer unsecured loans. Twenty-five out of 26 ask for a personal guarantee. The only loan company that doesn’t ask for one requires that your business be profitable, has a minimum annual turnover of £500,000 and at least a three-year trading history.

So, personal guarantees are the norm among lenders offering unsecured loans. Nevertheless, because signing one means putting your own money on the line if your company can’t cover the repayments, it’s worth checking what will be required of you – and specifically you, as an individual – if the company can’t repay what it’s borrowed.

Personal guarantees can apply to all shareholders

Twelve of the 26 lenders of unsecured loans we checked specifically require a Director to sign their personal guarantees, while three say a Director’s guarantee ‘may be required’, and the rest don’t make it clear before the full application process whether a Director is needed. In fact, some banks and lenders might refer to the agreement as a ‘Director’s Guarantee’ instead of a ‘Personal Guarantee’. Others use vaguer language, such as requiring ‘additional security’. As such, just because the phrase ‘personal guarantee’ isn’t mentioned on the lender’s site, it doesn’t mean one won’t be needed.

When you take on a personal guarantee, you aren’t necessarily the only one who is personally responsible for the loan. If guarantees from several Directors and shareholders are required, then they will usually have a responsibility to make sure the money is repaid. However, if you’re jointly responsible with, say, two other Directors and for whatever reason they up and vanish, you will be solely responsible for the entire loan, not just your third. For this reason, it’s important that you’re on the same page with fellow stakeholders about the expectations and responsibilities of the loan.

Giving personally responsibility can mean a faster, simpler loan

One of the great things about limited companies is that Directors and shareholders are typically shielded from any liability the company incurs beyond the value of their shares. So if you can’t pay a supplier or even your staff, your home remains safe.

In business finance, however, some degree of personal responsibility is preferred, if not required, by lenders to give them the confidence they need to lend you money. This can feel daunting if you aren’t used to being personally liable for the performance of your company, but it’s worth remembering that personal guarantees are a common way for lenders to more quickly and simply grant loans without security, thereby making funds more accessible to you.

As with any contract, it’s important you understand the obligations of a personal guarantee before agreeing and check the legal documents with an advisor to make sure you’ve not overlooked any important details.