As a business owner or director you may come across lenders asking for a personal guarantee (PG).
This can raise questions and concerns especially when you’re looking for finance for your business. Understand PG’s before you sign up as they can have a big impact on your future.
Our guide will explain what PG’s mean in business lending. Always get legal advice before signing a personal or directors guarantee.
What are Personal Guarantees
A personal guarantee (PG) is a legal agreement between a specific lender and a business owner or director.
By signing this document you are promising to pay the debt using your personal assets if your business can’t meet its financial obligations.
When a company can’t repay a loan the personal guarantee kicks in. The lender can then pursue you, the guarantor, for repayment. This transfers the liability from your business to your personal finances, your savings, investments or even your home.
Personal Guarantees (PGs) are common in business lending especially for smaller businesses or those with limited trading history. They come in two main types: limited and unlimited.
Let’s look at both with examples:
Limited Personal Guarantees
A limited personal guarantee limits the amount the guarantor is liable for if the business can’t pay back the loan. This limit is usually a fixed amount or a percentage of the loan amount.
Example:
Sarah owns an established bakery and wants to borrow £100,000 to expand. The lender agrees on a limited personal guarantee of 75% of the loan amount. If Sarah’s business can’t pay back the loan her personal liability is capped at £75,000 even if the debt is higher than that.
Unlimited Personal Guarantees
An unlimited personal guarantee means the guarantor is liable for the full amount of the loan plus interest and fees if the business defaults.
Example:
John has a tech company and needs £250,000 for product development. The lender requires an unlimited personal guarantee. If John’s company can’t pay back the loan he’s personally liable for the whole debt which could be more than the original £250,000 with added interest and fees.
Some lenders offer a middle ground where the guarantee is unlimited but with a time limit. For example the guarantor is liable for the full amount but only for the first 5 years of the loan term.
Remember a personal guarantee is a big commitment. Weigh up the benefits against the risks before you agree.
When Are Personal Guarantees Required?
Lenders can request personal guarantees in the following situations.
You may come across this when applying for business loans, commercial mortgages or property leases. They’re also common in invoice finance agreements and asset leasing arrangements.
Whether a lender asks for a personal guarantee depends on many factors. They consider your business size, age and credit history. The loan amount and the risk of your industry also come into play.
For new or small businesses with no assets, personal guarantees will often be the only way to get an application approved.
Legal Framework of Personal Guarantees
Personal guarantees must meet certain legal requirements to be binding.
The agreement must be in writing and signed by the guarantor. The terms and conditions must be clear and concise.
Courts will generally enforce personal guarantees if these conditions are met.
However if the guarantee was obtained through misrepresentation or undue influence challenges can arise. While the Financial Conduct Authority (FCA) doesn’t regulate most business lending, it does regulate consumer credit which can sometimes overlap with business finance.
Advantages and Risks of Signing a PG
Signing a personal guarantee can open up opportunities for your business.
It can give you access to more finance, potentially on better terms than you would get otherwise. This extra funding can fuel business growth and expansion.
But the personal risks are big.
By signing you’re exposing your personal finances to business debts. If your business fails your personal credit score will suffer. In the worst case you could lose personal assets including your home.
Alternatives to Personal Guarantees
Before signing a personal guarantee consider alternatives.
Secured business loans using company assets as collateral might be a better option. Some lenders offer invoice finance without personal guarantees.
Peer to peer lending platforms may offer more flexibility. Depending on your situation you may also be eligible for government backed loan schemes which have more favourable terms.
Protecting Yourself
If you do decide to sign a personal guarantee take steps to protect yourself.
Negotiate the terms with the lender. Try to limit your liability or set a time limit on the guarantee. You can also negotiate specific conditions for enforcement.
Seek legal advice.
An independent solicitor can review the agreement, explain it to you and potentially negotiate better terms on your behalf. They can help you understand the full extent of your exposure.
Consider personal guarantee insurance as an additional layer of protection.
This type of insurance will cover part of your liability if the guarantee is called in. It’s not always cheap but it gives you peace of mind and financial protection.
Personal Guarantee Insurance
Enforcing a Personal Guarantee
If your business defaults on the loan the lender will enforce the personal guarantee.
They will serve you with a formal demand for payment. At this point you’ll need to pay the amount owed or negotiate with the lender.
You may be able to arrange a payment plan or restructure the debt.
But if you can’t agree or make the payments the lender may take legal action. This could result in a court judgment against you and potentially the sale of your assets.
In the worst case you may face personal bankruptcy. This affects your immediate financial situation and can also impact your ability to run businesses in the future.
Personal guarantees are a big commitment for business owners.
They can give you access to funding but also put your personal finances at risk. Before signing consider your business’s financial health and future prospects. Consider the impact on your personal life and explore all alternatives.
Every business is different.
What works for one business won’t work for another. If you’re considering a personal guarantee or business finance options it’s always best to talk to an expert.
At Bridging Finance London we help business owners make sense of the complex. Our team can give you personal guarantee and alternative finance advice to help your business grow while protecting your personal position.
