Personal guarantee insurance for company directors

A personal guarantee is a promise to repay a business debt from your own money if the business can't. Many lenders ask for one on unsecured business loans, and often on secured loans, asset finance and invoice finance too. It gives the lender extra comfort, but it removes the separation between your business and personal finances that a limited company normally provides.

If the guarantee is called, the lender can pursue you personally, which can put savings, investments and potentially your home at risk.

• You take out a policy covering one or more personal guarantees you have given, usually renewed annually.
• If the business fails to repay and the lender makes a formal demand under the guarantee, you claim on the policy.
• The insurer pays an agreed proportion of your liability, up to the policy limit.
• The remaining amount is still your responsibility.

Where a company has several directors who have each signed guarantees, each director can usually be insured.

Policies rarely cover the whole guarantee. Cover typically starts at a lower proportion of the guaranteed amount and can increase the longer the policy has been in force. There is often an initial period during which claims can't be made, so PGI works best when taken out early, not when the business is already struggling. Check the policy wording for the exact cover level, waiting period and exclusions.

There is no fixed price. Premiums depend on the amount of the guarantee you want covered, the level of cover, your business's financial position and sector, and the insurer's assessment of risk. The only reliable way to know the cost is to get a quote.

• Directors signing personal guarantees for significant business borrowing.
• Directors whose personal assets, such as a home, would be exposed if the guarantee were called.
• Businesses with several directors who each carry guarantee risk.
• Businesses borrowing to grow, where the future is less predictable.

Sole traders and ordinary partners are already personally liable for business debts, so the position is different; take advice on what cover suits you.

An insurer assesses the risk of the guarantee being called, much as a lender assesses a loan. Expect questions about:

• The guarantees you want covered: the lender, the facility, the amount and whether the guarantee is capped or unlimited.
• The business's trading history, turnover and profitability.
• Recent accounts and, often, management accounts.
• Existing borrowing, arrears or known financial difficulties.
• The sector the business operates in.

Have copies of the signed guarantee documents and the facility agreements ready, as the insurer needs to see exactly what you have promised.

• Read the guarantee carefully and take independent legal advice.
• Check whether it is limited to a set amount or unlimited.
• Ask whether the lender will accept a lower guarantee or other security.
• Consider whether PGI is appropriate, and compare the premium with the risk you are taking.

Insurance is not the only way to manage guarantee risk. You may be able to negotiate a capped rather than unlimited guarantee, limit it to one facility instead of all monies owed, or offer business security instead, for example through asset finance where the equipment itself secures the debt. Some lenders ask for lighter guarantees than others, which is one reason to compare. Our guide to personal guarantees on business loans covers these options.

Personal guarantee insurance is offered by specialist insurers, and directors apply to them directly or through an insurance intermediary. Smart Funding Solutions is a credit broker, not a lender, and does not give insurance advice or recommend a policy. The insurer explains the policy and decides whether to offer cover. Before buying, you can check any insurer's or intermediary's status on the FCA Register.

Where we can help is on the borrowing side: approaching lenders whose guarantee requirements are lighter for your circumstances and explaining the guarantee wording in each finance offer before you sign. You should still take independent legal advice on the guarantee itself.