Everything you should know about Personal Guarantees for Business Borrowing

Written by James Dutton

Understanding personal guarantees

Business lending isn't always secured purely against what the business itself owns. Where a company is newer, has limited assets, or is applying for an unsecured facility, a lender may ask a director or owner to personally guarantee the debt instead.

This article looks at what that actually means in practice, why lenders ask for it, and what's worth thinking through before agreeing to one. It's general guidance rather than legal or financial advice, and it's always worth speaking to a solicitor before signing anything of this nature.

What is a personal guarantee?

A personal guarantee is a legal commitment from a named individual, typically a director or shareholder, to repay a business debt personally if the company defaults or becomes insolvent. It effectively removes the usual separation between a business's liabilities and an individual's own finances for the specific debt covered by the agreement.

Why do lenders ask for a personal guarantee?

Lenders use personal guarantees to offset risk where a business can't offer sufficient security of its own. This comes up particularly often with:

Unsecured business loans, where no specific asset backs the facility

Newer businesses without an established trading or credit history

Businesses whose available assets don't cover the full value of the borrowing requested

Higher-value facilities, where a lender may ask for guarantees from more than one director

What does agreeing to a personal guarantee involve?

The scope of a personal guarantee can vary. Some lenders ask for a guarantee covering the full amount borrowed, while others set it at a lower proportion, such as a fixed percentage of the debt. Where several directors are involved, a lender may split liability between them, or ask each to guarantee the full amount individually, so it's worth being clear on exactly what's being signed before agreeing to it.

If the business subsequently can't repay what's owed, the guarantor becomes personally responsible for the shortfall, which can extend to savings, property or other personal assets, depending on how the agreement is worded.

What are the potential benefits?

Wider access to finance: a personal guarantee can open up lending that might otherwise be out of reach, particularly for businesses without significant assets of their own.

Potentially improved terms: some lenders may offer more competitive pricing where a guarantee is in place, reflecting the reduced risk to them.

Support for growth plans: where finance is tied to a specific growth opportunity, a guarantee can be the difference between the funding being available or not.

What are the risks to weigh up?

Personal liability: if the business defaults and the debt can't be recovered from company assets, the guarantor is personally liable for what remains.

Impact on personal assets: savings, property and other personal assets can potentially be called upon to settle the shortfall.

Knock-on effects: where personal repayments are missed as a result, this can affect the guarantor's own credit standing, and in the most serious cases, lead to personal insolvency.

Restrictions during insolvency: an individual made bankrupt, or subject to a Debt Relief Order, is restricted from acting as a company director for the duration.

What's worth considering before signing?

Read the terms carefully: Understand exactly what proportion of the debt is covered, and under what circumstances the guarantee would be called upon.

Take independent legal advice: Many lenders require this as standard, often with a solicitor confirming in writing that the implications have been properly explained.

Look into guarantee insurance: Some insurers offer policies that cover a portion of the guaranteed amount, which can reduce personal exposure if the business is unable to repay.

Consider whether a personal guarantee is the only route: Depending on the type of finance being applied for, there may be options that don't require one.

Alternatives that may not require a personal guarantee

Depending on what a business has to offer as security, a few other routes may be worth exploring:

Asset-based lending: uses existing business assets, such as property or equipment, as security rather than relying on a personal guarantee.

Invoice finance: uses outstanding invoices as security, which can reduce or remove the need for a personal guarantee depending on the lender.

Asset finance: the asset being financed typically serves as its own security, which can lessen reliance on a personal guarantee.

Why speak to a broker before agreeing to a personal guarantee?

Whether a personal guarantee is required, and to what extent, varies considerably from lender to lender, even for a similar type of facility. A broker with access to a wide panel can help identify funders whose approach carries less personal exposure or points towards a different type of finance altogether.

MAF Finance Group can compare offerings from a wide range of banks and alternative funders to help find a finance solution suited to your circumstances.

To learn more or get a quote, fill out the form below. If you'd like to speak to someone directly, call us on 0115 858 1010 and a member of our team will be happy to help.