1. Home
  2. Business Loans
  3. What is a Personal Guarantee?
Published 11 July 2022

What is a Personal Guarantee?

A personal guarantee can allow smaller business owners to secure credit for their company that might otherwise be out of reach. But the risk for a business loan guarantor who signs up to a personal guarantee is that lenders can call on their personal wealth if the business can’t settle its debts.

When trying to secure finance for a business, a lender might ask for a personal guarantee from the business owner or an executive that they’ll make the repayments on the loan if it turns out that the business itself can’t.

Becoming a business loan guarantor in this way may be something you would prefer to avoid. But if you are willing to accept the conditions attached to it, the additional security that personal guarantees by directors can give to a lender could prove the difference in getting the funding that you want.

What are personal guarantees?

A personal guarantee is a legal agreement between a lender and the owner of a business who is promising to be a guarantor for credit awarded to their business. The main implication of this is that the owner can be held responsible for paying back the lender what is owed using their own 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 to what is often also called a “director’s guarantee” because it’s the only way they can secure the finance they need for their business.

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 to personally repay the loan should things go wrong, lenders might therefore be willing to 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 funding if they can’t provide the security a lender needs. 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.

It’s possible a lender might request a personal guarantee for businesses interested in:

Personal guarantee pros and cons

There are a few obvious benefits of personal guarantees, as well as important considerations to be aware of too.

Advantages of personal guarantees

Risks of personal guarantees

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 of a business should come to an end when this passes.

These limitation periods should be discussed and agreed when the personal agreement is drawn up. A solicitor can help you negotiate and make sure you understand the terms of the agreement.

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 all the terms of a guarantee agreement is essential. A solicitor can help you understand exactly where your responsibilities as a guarantor begin and end.

» MORE: Business insolvency and your personal finances

What happens if you default on a personal guarantee?

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

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. However, the insurance won’t ever cover the guarantee in its entirety. 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.

Most lenders will want you to have independent legal advice before signing a personal guarantee. From your own point of view, 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.

Image source: Getty Images

About the Author

Tim Leonard

Tim is a writer and spokesperson at NerdWallet who has over 20 years’ experience writing about almost all aspects of personal finance. During his career at Moneyfacts, Virgin Money and…

Read More
Dive even deeper
Is Your Business Sleepwalking its Way into Underinsurance?

Is Your Business Sleepwalking its Way into Underinsurance?

Being underinsured could mean you face an expensive bill if you need to make a claim. With a recent report estimating that 50% of UK businesses could be underinsured, regularly revisiting your policy will help make sure you’re not one of them.

‘The biggest challenge for small businesses is marketing’

‘The biggest challenge for small businesses is marketing’

Marketing your small business can be tough, especially if you don’t have the time or the resources. Two small businesses told NerdWallet about some of the lessons they’ve learned about marketing, social media and SEO.

Entrepreneur Spotlight: Georgina Atwell of Toppsta

Entrepreneur Spotlight: Georgina Atwell of Toppsta

As part of NerdWallet’s Entrepreneur Spotlight series, we spoke to Georgina Atwell, founder of children’s book review website She told us about how she got started, the challenges she faced when setting up her own website, and what advice she would give to future entrepreneurs.

Back To Top