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A Guide to Personal Guarantees and Business Borrowing

Find out how personal guarantees work when borrowing funds for your business

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in business loans

If you’re looking to raise money for your limited company, your lender is likely to insist on a personal guarantee.

While you can insure away some of this risk with personal guarantee insurance, you will still be personally liable for some of the debt. Let’s dive into what a personal guarantee is, how they work and why lenders request a PG.

What is a personal guarantee?

A personal guarantee is an assurance that you will personally repay a source of business credit in the event of the business failing to do so. This means that if your business fails to pay, then you are personally liable for that debt.

Whereas limited company law states that in the event of liquidation, the former directors and shareholders cannot be pursued, a personal guarantee completely changes that. You are personally creating a relationship between yourself and the lender. This means that if your business was liquidated, you are still tied to the debt.

When are they required?

Personal guarantees are required to support most business borrowing applications where the owners of the business benefit from limited liability, such as LLPs and Ltd companies.

Why do lenders request a PG?

By insisting on a personal guarantee, the lender is reducing their risk of losing money. If they have a personal relationship with you, rather than just with the business, they increase the chances of being repaid in full.

This increased security strengthens the lender’s position, which of course is a positive for them.

Do all lenders require a personal guarantee?

Most business lenders will require a personal guarantee. The level of assurance won’t always be the same as the loan amount, for some types of borrowing, the personal guarantee will be as little as 20% of the loan amount.

Can I borrow without giving a personal guarantee?

Finding a lender who is happy to lend to a company without the need for a PG is rare and may restrict your borrowing options.

That said, it is possible in some situations. If you have a strong business and personal credit history, you will have a better chance, although it is still far from the norm.

When is a personal guarantee called upon?

Personal guarantees are called upon in the event of the company failing to keep up the repayments on the loan. Much like a guarantor for a personal loan, there is no payment to make personally unless the main borrower defaults.

When in default, the personal guarantee will be called upon. In the event of the PG being called upon, you must settle the debt, whether that is done personally, through the business, or through any other means.

It’s important to note that a PG is valid for 6 years after the default taking place (12 years for a deed).

What happens if you default on a personal guarantee?

Should a PG be called upon and not settled, there are 2 possible outcomes. The first is that adverse credit is issued against you by way of a CCJ or default.

This may prevent you from being able to secure credit going forward, or mean that you’re forced to settle for a worse deal when doing so.

Secondly, if your PG is attached to a piece of security such as a car or property, you’re at risk of losing the item.

Personal guarantee insurance

If your finance application depends on you giving a personal guarantee, and you’re willing to do so, but want to protect yourself, there are options. Personal guarantee insurance is available and can be used to shield you from a large proportion of the liability.

This means that in the event that the PG is called on by the lender, the insurance policy will pay out to ensure you do not suffer financially. Of course, there is a cost associated with personal guarantee insurance, and this must be considered carefully before taking this route.

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