When securing finance for a business, lenders often request a personal guarantee from company directors or business owners. This is a common requirement, particularly for smaller or newer enterprises that may not have significant assets or a long trading history. While signing a personal guarantee can unlock vital funding opportunities, it is not a decision to be taken lightly. Understanding the advantages and disadvantages is essential for making an informed choice.
What Is a Personal Guarantee?
A personal guarantee is a legally binding agreement that holds an individual personally responsible for repaying a business debt if the company is unable to do so. This typically involves directors or shareholders pledging their own assets, such as property or savings, as security against the loan.
The Pros of Signing a Personal Guarantee
While the idea of putting your personal assets on the line can feel daunting, there are several compelling reasons why many business owners choose to sign a personal guarantee. In many cases, it can be the key to unlocking the finance needed to grow and develop a company. Below are some of the main benefits to consider.
- Improved Access to Finance
Lenders are more likely to approve funding when there is a personal guarantee in place. This additional security reduces their risk and can open doors to loans or credit lines that may otherwise be unavailable to the business. - Better Terms
A personal guarantee can often lead to more favourable loan terms, such as lower interest rates or longer repayment periods. This is because the lender has added assurance that the debt will be repaid, even if the business encounters financial difficulties. - Demonstrates Commitment
Signing a personal guarantee shows the lender that the director or owner has confidence in their business and is willing to back it financially. This can build trust and strengthen the relationship with the lender. - Supports Growth
Access to finance backed by a personal guarantee can enable a business to invest in equipment, inventory or expansion. This can accelerate growth and increase competitiveness in the market.
The Cons of Signing a Personal Guarantee
Despite the potential advantages, signing a personal guarantee carries significant risks that should not be underestimated. It is a serious financial commitment with legal implications that can affect your personal life and long-term security. Here are some of the key drawbacks to keep in mind.
- Personal Financial Risk
The most significant downside is the risk to personal assets. If the business fails and is unable to repay the loan, the individual who signed the guarantee may be pursued for the outstanding amount. This could include legal action and the seizure of personal property. - Impact on Credit Rating
Defaulting on a personal guarantee can damage the guarantor’s personal credit score, making it more difficult to secure future loans or mortgages. - Not always included in insolvency procedures
As a personal guarantee is not classed as an unsecured debt, in certain insolvency procedures, a personally guaranteed loan won’t be written off or included in payment plans. - Ongoing Liability
Some guarantees are not limited to a specific term and may remain in effect until explicitly cancelled. This means that even if a director leaves the company, they could still be liable for future debts unless the guarantee is formally removed.
Points to Consider
Before signing a personal guarantee, it is important to assess the risks carefully. Consider seeking professional advice and negotiating the terms of the guarantee where possible. For example, you may be able to agree a cap on the amount guaranteed or request that it applies only for a limited time or for a specific loan.
It is also worth exploring whether personal guarantee insurance is available. This type of cover can provide a degree of financial protection in the event of a claim.
In summary
Signing a personal guarantee is a serious commitment that can bring valuable benefits, particularly in terms of securing business finance. However, it also carries significant personal risks. By understanding the potential implications and seeking the right guidance, business owners can make a decision that supports their company’s growth while protecting their own financial wellbeing.
