- A personal guarantee is an agreement that a business owner will use their own assets to repay a business loan if their business can’t.
- Providing a guarantee can widen your loan options but puts your personal assets at risk.
- Personal guarantees are most common on unsecured business loans, 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?
- 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
- Find the right business loan for you
A personal guarantee is something a lender may ask you to provide if you’re looking to take out a business loan. If you agree to be a guarantor for a loan, you effectively make a promise to personally repay the loan if your business can’t.
Becoming a business loan guarantor may be something you would prefer to avoid. But if you are willing to accept the risk involved, the additional security personal guarantees give to a lender can help small businesses secure much-needed funding.
What is a personal guarantee?
A personal guarantee is a legal agreement where the owner or director of a business becomes guarantor for a business loan they wish to take out. In doing so, the owner can be held responsible for paying back the lender what is owed using their personal assets should the business default on its loan repayments or go insolvent.
For this reason, 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?
When might I need a personal guarantee?
A personal guarantee can help lenders mitigate the risk they feel they are taking on by lending to businesses. 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, lenders might offer a loan, or a larger amount of finance, than they otherwise would.
In particular, a personal guarantee could prove important in helping newer or smaller businesses secure loans if they can’t provide the security a lender needs. In these circumstances, an unsecured business loan might be a good option, but these usually require a personal guarantee.
An owner acting as a business loan guarantor might also help if a company’s credit history isn’t sufficient or good enough to make them eligible for a business loan purely on their own merit.
A lender might request a personal guarantee for:
- business loans
- start-up business loans
- commercial mortgages
- property leases
- invoice financing
- asset finance or leasing
» MORE: How to get a business loan
What are the risks of a personal guarantee?
A personal guarantee runs the risk of losing your personal assets if your business cannot meet its loan repayments. This could include your home, savings, investments, and other assets, such as your car. If these aren’t sufficient to cover what is owed, your 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 the extent to which a guarantor is personally liable if their business cannot repay any debts included within the scope of the agreement. 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
- It may allow start-up or small business owners to get financing 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.
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 business loan 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 business loan guarantor’s obligation to personally cover the 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, 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 that borrowed the finance for which the agreement applies. However, you can 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 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 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.
If you are hoping for a last-minute reprieve, the bad news is that most personal guarantees are enforceable. 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 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 and 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.
- secured business loans
- invoice finance
- asset finance
- grants
- equity finance
- angel investors
- crowdfunding
» MORE: Different types of business loan
Find the right business loan for you
A business loan can help get your business up and running or push it to the next level. Whether you’re willing to provide a personal guarantee or not, there are various pros and cons of business loans, and several loan options, to consider. NerdWallet is here to help you find the right loan for you and your business.
» MORE: Compare business loans
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