Personal Guarantees Explained

A personal guarantee is an agreement that a business owner will use their own assets, if necessary, to repay their business’s debts.
Providing a guarantee can widen your loan and business credit card options but puts your personal assets at risk.
Personal guarantees are most common on unsecured business loans and business credit cards, due to the absence of security for the loan.

Table of Contents

What is a personal guarantee?
Do all business loans require a personal guarantee?
Do all business credit cards need a personal guarantee?
When might I need a personal guarantee?
What are the risks of a personal guarantee?
What does a personal guarantee include?
Personal guarantee pros and cons
How long does a personal guarantee last?
Can you limit your liability under a personal guarantee?
How enforceable is a personal guarantee?
What is personal guarantee insurance?
Do you need legal advice before entering into a personal guarantee?
Alternatives to a personal guarantee

A personal guarantee is something a lender may ask you to provide if you’re looking to take out a business loan or a business credit card. If you agree to be a guarantor for a loan or credit card, you are effectively promising to personally repay any debts your business can’t afford to pay back.

To be clear: this means that if your business becomes insolvent, you’ll have to settle your firm’s debts using your own money.

For this reason, you might not want to sign a personal guarantee. But if you are willing to accept the risk involved, lenders could be more likely to accept your application for funding or finance.

This is because personal guarantees offer extra security for the finance provider, which makes lending to your business less risky from their perspective.

What is a personal guarantee?

A personal guarantee is a legal agreement whereby the owner or director of a business becomes the guarantor for a business loan or business credit card they wish to take out.

This means the business owner can be forced to use their personal assets to repay the lender if the business defaults on its repayments or becomes insolvent.

A personal guarantee could cover the entire value of the loan or just a chunk of what your business has borrowed. The larger the personal guarantee, the less your lender stands to lose if, for whatever reason, your business can’t repay its debts.

A personal guarantee is not something to be entered into lightly. But equally, many business owners are willing to sign up for what is often also called a “director’s guarantee” because it’s the only way to secure the finance they need for their business.

Do all business loans require a personal guarantee?

It is possible to get a business loan without a personal guarantee. In particular, secured business loans don’t always need a personal guarantee. This is because a business asset must be put forward as security for the loan, which a lender would use to repay the loan if payments aren’t met.

It is more common for personal guarantees to be required on unsecured business loans, where no security is required. This leaves the lender at greater risk if payments aren’t made. That said, some lenders still offer unsecured business loans with no personal guarantee.

» MORE: How do business loans work?

Do all business credit cards need a personal guarantee?

It’s common for business credit cards to require a personal guarantee (although this isn’t always the case).

If you want a business credit card and your business hasn’t been trading long (meaning you haven’t had a chance to build up a strong business credit score) it’s more likely that you’ll be asked for a personal guarantee as part of your credit card application.

Generally speaking, only the largest and most profitable businesses will be able to access business credit cards without a personal guarantee.

» MORE: Business credit cards for bad credit history

When might I need a personal guarantee?

A personal guarantee helps reduce the perceived risk in lending to your business.

Because of the additional safety net of being able to call on the business owner or director to personally repay the loan should things go wrong, a personal guarantee could convince a lender to finance new or unproven businesses or offer a larger loan than they otherwise might.

In particular, a personal guarantee could prove important in helping newer or smaller businesses secure business loans or access business credit cards if they can’t provide the security a lender needs.

An owner acting as a guarantor might also help if a company’s credit history isn’t sufficient or good enough to make them eligible for business finance purely on their own merit.

A lender might request a personal guarantee for:

» MORE: How to get a business loan

What are the risks of a personal guarantee?

A personal guarantee means you run the risk of losing your personal assets if your business cannot meet its loan or credit card repayments.

You might, for example, lose your home, savings, investments, and other assets, such as your car, if your business goes under. If these aren’t sufficient to cover what is owed, your personal credit history may be negatively impacted, and personal bankruptcy is possible.

What does a personal guarantee include?

A personal guarantee should clearly outline the scope of the agreement and what lending is covered by it. For example, it might relate to one specific loan or the agreement could apply to a variety of different facilities from the same lender. This is crucial to understanding your full liability as a guarantor.

The terms of a personal guarantee should also outline what proportion of the total loan value a guarantor is personally liable for. Some guarantees cap the extent to which a guarantor is personally liable.

Provisions and terms included within a personal guarantee should be thorough and can include terms that might change a guarantor’s obligations over time. As such, it is essential to understand the full terms of any agreement before signing.

Personal guarantee pros and cons

Advantages of personal guarantees

They can allow start-up or small business owners to access finance if they have little credit history or bad credit.
A lender might offer more favourable terms because of the guarantee.
The funding can help your business grow.
They make it easier for most small businesses to access a business credit card and all the associated benefits and rewards.

Disadvantages of personal guarantees

Your business’s ability to repay its loans might change.
Unless you are set up as a partnership or sole trader, personal assets can’t usually be pursued by creditors to settle business debts, but with a personal guarantee they may be able to if the business cannot pay.
As a guarantor, your savings, investments, home and other assets could be used to repay what is owed by the business, putting your personal finances at risk.
If your assets are insufficient to cover repayments and debts, your personal credit score may be affected and you could end up personally bankrupt.

How long does a personal guarantee last?

A personal guarantee is valid for the length of time specified in the agreement. If there is a time limit for the guarantee, a guarantor’s obligation to personally cover their business’s debts ends when this passes.

These limitation periods should be discussed and agreed when the personal agreement is drawn up.

Be aware that some personal guarantees may be arranged to remain in place indefinitely in what is known as “continuing security”. Repaying the loan in full may not mean your liability as a guarantor automatically ends – you may need to ask the lender to bring it to a formal stop. A solicitor can help you negotiate and make sure you understand the terms of the agreement.

It’s also worth noting that a personal guarantee can still apply to a company director even after they have left the business where the agreement applies. You should ask to be released from the obligations of your personal guarantee when leaving the company.

Can you limit your liability under a personal guarantee?

It might be possible to negotiate a cap on the amount of debt you could be liable for under a personal guarantee. It’s also important to establish which loans or financial products will be covered by the guarantee and the situation regarding any additional credit that might be taken out from the same lender in the future.

Carefully considering the terms and conditions of a guarantee agreement is essential. A solicitor can help you understand your responsibilities as a business loan or business credit card guarantor.

How enforceable is a personal guarantee?

Defaulting on a personal guarantee may allow the lender to claim any asset that was put forward as collateral. If you don’t pay on time, you risk legal action from the lender or even a petition to make you bankrupt.

Enforceable personal guarantees must be:

Written down: There must be a written copy of the agreement.
Signed: The agreement should be signed by the guarantor or someone authorised to do so on their behalf.
Clear: Terms of the personal guarantee must not be cryptic, and there should be clear evidence of offer, acceptance, consideration, intention and capacity.

Other circumstances, such as the guarantee having been signed under duress, or the terms having been changed without you being told, can make an agreement unenforceable. If you are unsure, seek legal advice.

Does a personal guarantee need to be witnessed?

Many lenders will require a personal guarantee to be signed by a business owner or director in the presence of a witness. Typically, this will be a solicitor, who may also be required to confirm that the guarantor has taken legal advice and understands the risks of the guarantee.

What is personal guarantee insurance?

Personal guarantee insurance can be taken out by a business loan guarantor to provide some financial protection to their personal wealth should the guarantee be called on. The insurance won’t cover the guarantee in its entirety, instead typically covering between 60% and 80%. The cost of the personal guarantee insurance policy will vary depending upon factors such as the size of the guarantee and the assets being used as security.

You can obtain personal guarantee insurance for existing guarantees or brand new ones, while coverage can extend across multiple guarantors or guarantees.

Do you need legal advice before entering into a personal guarantee?

Most lenders will want you to have sought independent legal advice before signing a personal guarantee. Seeking such professional advice can help ensure you are fully aware of the terms of the agreement you’re about to enter into. A professional could also assist with negotiations on these terms, if necessary.

Alternatives to a personal guarantee

If a personal guarantee is not right for you, there are business finance options which may not require them. These include:

» MORE: Different types of business loan

About the Authors

Tim Leonard

Tim is a lead writer at NerdWallet and holds the Chartered Insurance Institute (CII) Level 3 Certificate in Mortgage Advice. He has over 20 years’ experience writing about almost all…

George Harrison

George Harrison is a lead writer at NerdWallet. A graduate of the London School of Economics, George has worked as a professional writer for almost a decade, with articles appearing…

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