What is a personal guarantee on a business loan?

A limited company is a separate legal entity. Without a guarantee, if the company fails, the lender can only recover what the company itself owns. A personal guarantee gives the lender another route to repayment and shows that the directors are personally committed to the business.

For smaller businesses and unsecured loans, a guarantee is often a standard condition rather than something that can be negotiated away entirely.

1. You sign the guarantee alongside the loan agreement.
2. The business borrows and repays as normal. The guarantee is called on only if the business defaults, so plan as if it could be.
3. If the business defaults, the lender will usually pursue the company first, though the guarantee may allow it to go straight to the guarantor.
4. The lender makes a formal demand on the guarantor for the amount due under the guarantee.
5. If you cannot pay, the lender can take legal action, which may lead to a judgment, a charge over your property or, in serious cases, bankruptcy proceedings.

• Unlimited guarantee: covers the full debt plus interest and costs. The highest-risk form for a guarantor.
• Limited or capped guarantee: your liability is capped at an agreed amount or percentage.
• Joint and several: where several directors guarantee, the lender can pursue any one of them for the full amount, not just their share.
• All-monies guarantee: covers all debts the business owes that lender, now and in future, not just one loan.
• Supported guarantee: backed by a charge over a specific personal asset, such as your home. Welcome Finance does not arrange finance that involves a charge over anyone's home.

Loans under the British Business Bank's Growth Guarantee Scheme, offered through accredited lenders, give the lender a 70% government-backed guarantee. That guarantee protects the lender, not you: the business remains fully liable for the debt, and lenders can still ask for personal guarantees at their discretion. One useful protection is that a principal private residence cannot be taken as security under the scheme.

• The amount: is it capped, and does it include interest, fees and enforcement costs?
• The scope: does it cover one loan or all current and future debts with that lender?
• Joint liability: if other directors sign, can you be pursued for the whole amount?
• Triggers: what counts as a default, and must the lender pursue the company first?
• Duration: when does the guarantee end? Leaving the company does not necessarily release you.
• Security: is the guarantee backed by a charge over your home or other assets?
• Spouse or partner involvement: some lenders ask for a spouse's consent where a jointly owned home is involved.

Guarantees are not limited to bank or alternative lender loans. Directors are often asked to guarantee commercial leases, supplier credit accounts, asset finance agreements, invoice finance facilities and merchant cash advances. Invoice finance providers may also ask for an indemnity, which covers specific risks such as invoices that turn out to be disputed or invalid. Over time a director can build up several guarantees without a clear picture of the total exposure, so keep a list and review it whenever you take on new commitments.

• Negotiate a cap on the guarantee where possible, especially for larger loans.
• Ask whether the guarantee reduces as the loan is repaid.
• Consider personal guarantee insurance, which some insurers offer to cover part of a guarantee liability. Read the policy terms carefully.
• Keep a record of every guarantee you have signed and review them regularly.
• If you leave a business, ask the lender to release you formally, in writing.

If you receive a demand, do not ignore it. Seek legal advice straight away. There may be room to negotiate a settlement or repayment plan, and a solicitor can check whether the guarantee is enforceable as drafted. If the business is struggling, speak to an insolvency practitioner or accountant early, as acting sooner can protect your options.

If you think a lender has treated you unfairly, check whether you can complain to the Financial Ombudsman Service. It can consider some complaints from individuals who gave a personal guarantee on or after 1 April 2019 for a loan to a business that meets its micro-enterprise or small business size tests, where the lender is within its jurisdiction. Complaints about firms that are not FCA-authorised generally fall outside it.

A personal guarantee can put your personal finances and your home at risk. Some lenders require guarantors to take independent legal advice before signing. Even when it is not required, it is worth doing. If, after advice, you are not comfortable with the personal exposure, it is better not to borrow, or to borrow less, than to sign something you do not understand.

Welcome Finance is a commercial finance broker for limited companies, LLPs and partnerships of four or more partners. We tell you upfront which lenders are likely to want a guarantee and on what basis, and include options with more limited guarantee requirements where they exist. We cannot give legal advice on a guarantee. Check your eligibility in 60 seconds; it will not affect your credit score.