What is a personal guarantee for a business loan?

How does a personal guarantee work when taking out a business loan?

Personal guarantees for business loans offer reassurance to lenders that they’ll be able to recoup their money should the company be unable to pay, and are a common requirement for businesses when seeking borrowing.

Whilst reducing the risk to lenders, however, they do present a risk for company directors. It’s important, therefore, to understand the potential implications of providing a personal guarantee for a business loan, and to mitigate the risk where possible.

What is a personal guarantee?

A personal guarantee is a legally binding agreement that you’ll take over liability for business borrowing if it can no longer afford to repay. If your business declines, for example, its financial obligations may be unmanageable, even though the loan repayments were affordable when the borrowing was taken out.

Trading conditions can change with little warning or you might experience a slow decline into financial instability with increasing pressure on company finances. Your guarantee represents the security the lender needs to recoup their money.

How could a personal guarantee affect you?

Once your business defaults on the loan repayments the lender will activate the personal guarantee you’ve provided. They now have a legal claim to your assets as an individual to the level of the outstanding loan.

A lender will expect full repayment of the loan, which could place severe pressure on your personal finances. In the worst-case scenario, you may be forced into bankruptcy with the ensuing loss of your home and other significant assets.

This is why it’s important to carefully consider the terms of the guarantee and to obtain professional advice before going forward.

Considerations when providing a personal guarantee

Negotiating your liability under the guarantee

You may be able to negotiate a cap on the amount that you have to repay if your company fails.

Applying caution before signing

It’s easy to decide to provide a personal guarantee when your business is thriving, but this is a best-case scenario that may not last for the duration of the loan term.

Helping your business grow

On the other hand, you may believe that providing a personal guarantee is the only way to secure business borrowing if your company is young.

Taking out insurance to mitigate your risk

Personal guarantee insurance can mitigate some of the risks but won’t cover the entire liability.

Consider alternatives to a personal guarantee

With such a wide range of alternative finance options now available to businesses, you may not need to provide a personal guarantee. Invoice finance is just one example of a flexible funding method, which uses the value locked within your sales ledger.

Asset-based funding and working capital loans also provide flexible solutions that don’t risk your finances as an individual. UK Business Finance are commercial finance brokers and can help you find suitable funding for your business. We take a whole of market approach, with no charge for our services, so get in touch with our expert team to see how we can help.