If you’re looking to take out business finance, many lenders will request a personal guarantee. While this might give you cause for concern, personal guarantees can help you access more funding options, as they reduce lender risks.

In this article, we explore what personal guarantees consist of, the risks to consider, and the key benefits for growing businesses.

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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. It’s a legally binding agreement that 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.

However, taking on this kind of obligation can impact your own personal finances, credit score and ability to borrow in future, so it’s essential to understand how personal guarantees work before you sign one. 

Differences between limited and unlimited guarantees

A limited guarantee minimises a guarantor's liability to a specific amount, timescale or set of obligations, while using an unlimited guarantee means you’ll be fully liable for the debt and all the lender’s obligations.

As the name suggests, a limited guarantee will limit your exposure and reduce the risk and burden of signing the agreement. So, 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.

When would I need a personal guarantee?

A personal guarantee is like a safety net for financial lenders and is usually required for unsecured business loans, as in this type of loan, you’re not required to provide business assets as collateral against the loan. So, personal guarantees offer an alternative to using assets as protection for the lender, so they have the means to recoup the debt if needed.

Some of the most common scenarios where a lender may request a personal guarantee include:

• Small business loans
• Asset leasing arrangements
• Mortgages
• Trade credit
• Invoice finance agreements
• Property leases

What are the advantages of a personal guarantee?

Agreeing to a personal guarantee is a serious decision, but it can offer opportunities to businesses which may have previously been out of reach.

Here are some of the main advantages of personal guarantees:

• A better chance of accessing funding – committing to a personal guarantee offers more security for lenders and incentives to provide capital, opening up more access to business finance.
• Improved lending terms – the reduced lender risk means you may get better loan terms, such as lower interest rates or higher credit thresholds.
• Achieving your business goals – signing a personal guarantee can help get the finance you need to support your goals and growth ambitions. 

If you’ve been turned down for finance previously, agreeing to a personal guarantee could be one of the ways to access key funds to realise your business potential.

Personal guarantees on business loans

Small businesses present more risks to lenders, and as a result, you may find it difficult to get a business loan. However, by agreeing to a personal guarantee, it will improve your chances, as it’s an extra layer of reassurance for the lender that the debt will be repaid.

Like any standard business loan, the company borrowing the funds must pay it all off. But, with personal guarantees included in financial agreements, business owners or stipulated individuals will be responsible for paying what’s owed if the business is unable to do so in the future.

What are the disadvantages of a personal guarantee?

Understanding the potential consequences of personal guarantees should also be part of your decision-making, so you can decide whether you’re prepared to sign an agreement.

Here are the main disadvantages of using a personal guarantee:

• Future uncertainty – even if you’re confident your business will keep up with loan repayments, things may not work out that way, as there are always unexpected events that can impact business finances. 
• It’s a personal burden – if your company becomes insolvent, the loan debt responsibility falls to you as the business owner, which can be a big burden to take on.

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.

5. Explore Alternative Financing Options

• Secured Loans: Investigate other financing options that might not require a personal guarantee, such as secured loans that use business assets as collateral.
• Asset Finance: Borrowing based on the value of physical assets that you either possess or wish to purchase, guaranteed by the equipment itself.
• Invoice Finance: Financing a percentage your outstanding (unpaid) invoices to get part of their value now and the remaining once they’re paid, minus the lender's fee and interest.
• Small Business Grants 

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.

Take a look at the following key considerations before you agree to a personal guarantee:

1. Understand the terms and conditions: Determine the extent of your liability, duration of guarantee and conditions for enforcement, including what constitutes a default and the timelines/limits involved.
2. Check your risk level: Evaluate your personal financial situation, including assets, liabilities, income and expenses, and consider your risk tolerance and how taking on potential business debt might impact your financial stability. 
3. Seek legal and financial advice: Engage with independent financial and legal advisers to review the guarantee agreement, as they can help you understand the impact on your finances and your ability to pay, if required.
4. Consider personal guarantee insurance: While this can protect your personal assets, understand what percentage of the debt is covered and weigh up the cost of premiums against the protection offered to determine if it’s a worthwhile investment.
5. Explore alternative financing options: Not all business finance agreements require a personal guarantee, so consider other funding options, such as:
   
   1. Secured loans – loans that use business assets as collateral.
   2. Asset finance – borrowing based on the value of physical assets/equipment you either possess or wish to purchase, secured by the assets.
   3. Invoice finance – advances of outstanding client invoices to unlock capital to use for key operations or investments.
   4. Small business grants – potential funding that doesn’t require repaying the capital, often offered via government-backed schemes.
      

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. 

For example, you can negotiate to end the guarantee sooner than the loan term stipulates if you make consistently prompt loan repayments or overpay, when possible.

Does a personal guarantee affect your credit score? 

Signing a personal guarantee shouldn’t affect your business credit score, as it focuses on your personal credit. It also shouldn’t significantly impact your personal credit score, so long as all the repayments are made on time. However, if your business falls behind on repayments, it can affect both your business and personal credit scores. Personal guarantees blur the lines between your business and personal finances from the lender’s perspective.

Plus, as you’d be liable to pay debts, it could result in a loss of savings, bank accounts being frozen, or other personal assets being at risk of repossession, which would impact credit ratings and hinder future funding prospects.

Directors’ guarantee vs. personal guarantee

When a personal guarantee is requested in a business finance application, the person providing the guarantee can be the business owner, the director or a senior executive, or another individual who is taking responsibility for the debt if the company runs into financial problems.

With directors’ guarantees, the director of a company is personally liable to repay the debt if the business is unable to repay a loan or credit due in a finance facility. For a company director to enter into this agreement, it usually indicates confidence in the business and its financial health and prospects. 

Agreeing to a personal guarantee is not a simple decision. Whether the director or another individual within the business agrees to a guarantee against the loan, they are then liable for the repercussions if the business defaults on its payments, which puts personal assets at risk, including savings, vehicles or property, as lenders seek to recoup debt that’s owed. Also, personal credit scores can be affected, as it means personal and business finances are more closely linked.

Personal guarantees for flexible business loans

Personal guarantees are pretty common in business finance. With iwoca’s Flexi-Loans, we do usually require a personal guarantee, but as our loans are unsecured, you’re not required to use business assets as collateral against the loan. So, it’s quick and easy to apply, with approval decisions provided within 24 hours. 

You can borrow between £1,000 and £1 million for a few weeks and months, right up to 5 years. We ensure your repayments are affordable and aligned with cash flow, and only charge interest on the funds you draw down, lowering your overall cost of borrowing.

Personal guarantees FAQs

Is a personal guarantee legally binding?

Yes. As soon as a personal guarantee is in writing and signed by the guarantor, it becomes an enforceable contract.

In the event of a company’s insolvency, the individual will be given a timeframe to pay the outstanding payment. If this isn’t met, lenders may take legal proceedings against you.

How long does a personal guarantee last?

As long as stated in the contract. It may also become unenforceable after a limitation period, after which the creditor won’t be able to claim, but again, 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.

Are business credit cards personally guaranteed?

When taking out a business credit card, you may be asked to sign a personal guarantee. This is often the case for small businesses, as the credit card issuer is taking more of a risk.

However, this won’t be the case every time. There are business credit cards available that don’t require a personal guarantee, so do extensive research to understand your options.

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