Personal guarantees at a glance

• What they are: Personal guarantees are legally binding commitments where a business owner, director, or senior executive acts as a guarantor for their company's debt.
• Why lenders use them: They serve as a safety net for lenders, typically used on unsecured lending products where no business assets are provided as collateral.
• The benefits for your business: Agreeing to a personal guarantee can improve your chances of accessing vital business finance, often unlocking lower interest rates and longer repayment terms.
• The risks of personal guarantees: If your business faces insolvency or defaults on its payments, the financial responsibility falls directly to you. This puts personal assets at risk.
• The impact on credit: While simply signing the agreement does not affect your personal credit score, falling behind on payments will negatively impact your personal credit rating and hinder future borrowing prospects.

What is a personal guarantee?

A personal guarantee is a promise made between a business owner or executive and a lender, meaning you act as guarantor for your company’s debt. 

This agreement states that you 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. This incentivises them to issue credit, knowing they have this guarantee in case the company runs into financial issues in the future.

Personal guarantees often last as long as stated in the contract. Although they may become unenforceable after a limitation period, after which the creditor won’t be able to claim, this will depend on the contract. Every personal guarantee is different, so it’s important to ensure you understand the agreement and get legal advice before signing on the dotted line. 

Differences between limited and unlimited guarantees

A limited guarantee minimises a guarantor's liability to a specific amount, timescale or set of obligations. If using a limited guarantee, you're only agreeing to a certain proportion of the debt if the business can’t make the repayments, and there may be an expiry date and termination option if you meet agreed conditions.

Whereas agreeing to an unlimited guarantee means you’ll be fully liable for the debt in the case of default or insolvency. 
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Which products require a personal guarantee?

A personal guarantee is often required on a range of commercial finance products, including:

• Unsecured business loans
• Asset leasing arrangements
• Trade credit 
• Invoice finance 
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Who can provide a personal guarantee?

The individual(s) providing the guarantee can be the business owner(s), the director(s), a senior executive, or another individual who is taking responsibility for the debt. It is common for a lender to require a personal guarantee from multiple individuals, for example from all company directors. 
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Why do business loans require a personal guarantee? 

Personal guarantees are a common feature of unsecured business loans as in this type of loan, you’re not required to provide business assets as collateral against the loan. Personal guarantees offer an alternative to using business assets as protection for the lender, so they have the means to recoup the debt if needed.

For this reason, providing a personal guarantee can improve your chances of accessing business finance with a lower interest rate and longer term. However, it’s important to remember that should your business not be able to repay the loan, your personal finances and personal credit score are at risk.
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Which lenders use personal guarantees on business loans?

Small business lenders across the finance spectrum often use personal guarantees, since they open up lending to companies that may not have the assets to apply for a secured loan.  

This includes both traditional banks like Barclays, Lloyds and NatWest, as well as digital lenders, such as iwoca, Capify and Funding Circle.
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What happens if my business defaults?

If your business is unable to make its repayments or faces insolvency, the legal and financial responsibility for clearing any debt under a personal guarantee falls directly to you.

Before signing an agreement, it’s important to be aware of the specific consequences you could face if your business defaults:

• Repayment demands and legal action: In the event of company insolvency, you will be given a specific timeframe to pay the outstanding balance. If you fail to meet this deadline, the lender can initiate legal proceedings against you.
• Risk to personal assets: In extreme cases, lenders seeking to recoup the owed debt could freeze your bank accounts, make claims against your savings, or pursue major personal assets like your vehicles and property.
• Long-term credit damage: Defaulting on a personally guaranteed loan will negatively impact both your business and personal credit scores. This can severely hinder your ability to secure future business funding or personal credit.
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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.
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Is it possible to negotiate a personal guarantee?

Terms for a personal guarantee are largely set by the lender, but you may have options to negotiate. This can involve agreeing on a limited guarantee, where you’re not responsible for the whole amount, which is usually possible if your creditworthiness is high, and therefore, the risk level is lower for the lender. Also, when demonstrating responsible debt management, lenders may offer better guarantee terms for future loans. 
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Does a personal guarantee affect your credit score? 

Signing a personal guarantee alone does not affect your credit score. However, if your business falls behind on repayments and you then miss payments yourself, it will have an impact on your personal credit score. The outstanding amount will be recorded as owing by you – which will lower your credit score if not repaid.
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Personal guarantees on iwoca business loans

At iwoca, we aim to help as many businesses as possible, even ones which might seem risky to traditional lenders and even those without the assets on hand to apply for a secured loan. This is why all iwoca loans are unsecured business loans. But we do require a personal guarantee on all iwoca loans to account for the extra risk that we take on. 

Personal guarantees help us say ‘yes’ to more businesses to fund their next big opportunity, manage the unexpected, and grow on their terms. 

Without the need to assess collateral, we make it quicker and easier to apply, with decisions provided within 24 hours. You can borrow between £1,000 and £1 million for 1 to 5 years, with the option to repay early anytime without ever facing any early repayment fees. 

Apply for an iwoca business loan today.