Many directors are surprised to be asked for a personal guarantee. A limited company is a separate legal person, so it can feel as though its debts should stay with the company. A personal guarantee changes that for one specific debt. It is one of the most common requests in business lending, and also one of the most commonly signed without being fully understood.
What you are promising
A personal guarantee is a promise by an individual, usually a director or shareholder, to repay the lender if the company can’t. If the business defaults, the lender can come to you personally for the amount covered by the guarantee. Depending on the wording, that may include interest, fees and the lender’s costs of recovery, not just the original loan.
Lenders ask for guarantees because they show commitment and give them a second route to repayment. They are particularly common on unsecured business loans, where there is no specific asset to fall back on, but they can appear alongside secured lending too.
The details that matter
Guarantees vary a great deal, so the wording is worth reading closely.
- Limited or unlimited. A limited guarantee caps your liability at a fixed amount. An unlimited guarantee can cover everything the company owes under the agreement.
- Joint and several liability. Where several directors sign, the lender can usually pursue any one of them for the full amount, not just their share.
- All monies wording. Some guarantees cover any debt the company owes the lender, including future borrowing, not just the loan in front of you.
- Security. Some guarantees are backed by a charge over personal property. Others are unsecured, although a lender could still seek a charge later through the courts if a debt goes unpaid.
- Release. Check whether the guarantee ends when the loan is repaid, and what happens if you leave the business.
Practical questions to ask
It is reasonable to discuss a guarantee rather than treat it as fixed. Lenders don’t always move, but these are fair questions:
- Can the guarantee be limited to a set amount or a percentage of the loan?
- Can it reduce as the balance is repaid?
- Is it needed from every director, or only some?
- Would offering business security reduce or remove the need for it?
- Does the product sit under a government scheme with its own rules on personal guarantees?
Some government-backed schemes restrict what lenders can take. For example, under the Growth Guarantee Scheme a director’s main home can’t be taken as security. Other personal assets may still be at risk, so the restriction is helpful but not a full shield.
Before you sign
Take independent legal advice. Many lenders require it, and a solicitor can explain exactly what the document commits you to. Talk to your family if shared assets could be affected. Some insurers offer personal guarantee insurance, which can cover part of the liability if a guarantee is called, and it may be worth asking about.
Most of all, sign only for borrowing you are confident the business can afford. A personal guarantee is not a reason to avoid sensible finance, but it does mean the decision to borrow is a personal one as well as a business one.
This article is general information, not financial advice. Loanleaf is an introduction service, not a lender or broker, and is not authorised by the FCA.
