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Do I need to give a personal guarantee for a business loan?

PUBLISHED ON: 18/12/2023

Commercial lenders typically require some form of security before sanctioning a business loan. This can take the form of a company asset or sometimes a personal guarantee from one or more of the directors.

Providing a personal guarantee may not appear to be risky if your company is flourishing and there’s no suggestion of financial difficulties in the near future. A business can decline very quickly, however, so it’s vital to seek professional advice before signing a personal guarantee for business borrowing.

UK Business Finance can provide the support you need when seeking funding for your company to ensure you secure the most appropriate lending for your business needs.

What is a personal guarantee for a commercial loan?

A personal guarantee is a legally binding document drawn up between a commercial lender and a borrowing business. A personal guarantee essentially provides a lender with a means to recover their money if a business can no longer afford to make the repayments.

Personal guarantees can vary in their detail and the timescale in which they can be enforced so it’s important to understand the risks they present to you as an individual. If any fellow directors also sign a guarantee and the company later fails, the liability will typically be ‘joint and several.’

This means that, if the other directors cannot pay, the lender can still pursue you for the full sum outstanding. Loans that aren’t secured on a business asset commonly require a personal guarantee to be provided – this lessens the lender’s risk and can offer you access to better loan terms.

Loans for higher amounts that are secured on a physical asset may also need a personal guarantee to be provided. Guarantees aren’t always for the full amount of the loan, however - each one is unique and sometimes only a percentage of the borrowing is covered by a personal guarantee.

Should I provide a personal guarantee for a business loan?

Personal guarantees open up the options available to your business with regard to financing and can be the catalyst for growth. They can also help you secure lower interest rates and more favourable terms, and you may gain access to a higher funding level.

There is a risk to your personal finances, however, and the level of your liability will be documented in the contract. If you cannot afford to meet your lender’s demands under the guarantee, you may face personal bankruptcy.

Can I protect myself from the risks of a personal guarantee?

You can take out personal guarantee insurance, which can cover a proportion of the sum involved, and may allow you to repay the remainder from your personal finances if your business collapses.

We can also scour the finance market for more suitable borrowing options taking into account your requirements and those of your company. UK Business Finance are experienced commercial finance brokers and we understand the criteria of all UK lenders - please get in touch with our expert team to find out more.

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