Business loans without a personal guarantee: what is realistic

A limited company's liability is limited, which is exactly what makes it a harder credit risk for a lender. GOV.UK's summary of directors' responsibilities in a limited company sets out how the company's finances are kept separate from the directors' own. When a small company fails, there is usually little left in it for unsecured creditors. A guarantee gives the lender a second route to repayment and, just as importantly, shows that the directors are committed.

So the realistic question is not "who lends without a guarantee" but "what would a lender accept instead". The answer depends on what the business has.

Under the British Business Bank's Growth Guarantee Scheme, participating lenders may still take personal guarantees, but the scheme rules state that a borrower's principal private residence cannot be taken as security. The British Business Bank's page for businesses sets out the current terms, and our Growth Guarantee Scheme guide covers eligibility. The government guarantee protects the lender, not the directors, and the company remains fully liable.

For most unsecured borrowing by smaller companies, a guarantee will be a condition. The terms are often more negotiable than directors assume:

• Cap the amount. Ask for liability limited to a fixed sum or a percentage of the facility.
• Avoid all-monies wording. Limit the guarantee to the specific loan, not every present and future debt to that lender.
• Several rather than joint and several. With more than one director, ask that each is liable only for their share.
• Unsupported, not secured. Resist a charge over your home being taken alongside the guarantee.
• Release triggers. Agree that the guarantee falls away once the balance reduces to a set level or after a period of good conduct, and on your leaving the company.
• Insure part of it.Personal guarantee insurance pays a proportion of a called guarantee, subject to its terms and waiting periods.

Our guide to personal guarantees explains each type in detail. Take independent legal advice before signing.

If your main concern is your own credit file, our guide to how a business loan affects personal credit explains when a guarantee shows on your file and when it does not.

Borrowing without a personal guarantee is most realistic for established, profitable limited companies with net assets or security the lender can rely on instead of the directors. Before waiving a guarantee, lenders look for:

• Several years of filed accounts showing consistent profit.
• Net assets comfortably exceeding the borrowing, with little owed to directors.
• Security the lender can realise: property, equipment or receivables.
• Conservative borrowing relative to cash flow.
• Clean credit for the company and the directors.
• Management accounts produced promptly each month.

A company that has just been formed, or that has distributed most of its profit, will find few lenders willing to rely on the company alone.

Arranging finance without a personal guarantee typically takes longer than a standard guaranteed loan, often two to eight weeks depending on the security. Because the lender is relying on the company alone, it looks harder at the accounts, net assets and management information, and larger requests usually go to a credit committee. Asset-backed facilities on equipment can move within a week or two once the asset is identified. Invoice finance needs a review of the sales ledger before the first advance. Borrowing against company property needs a valuation and legal work, which is usually the longest stage. Negotiating guarantee terms, caps or release triggers also adds time, so raise the question at the start rather than when the offer arrives. Prompt, up-to-date management accounts are the single biggest help.

If a fully unguaranteed facility is not available, the main alternatives are a capped guarantee backed by personal guarantee insurance, borrowing secured on company assets through asset refinancing or invoice finance, or borrowing less. A facility without a guarantee usually costs something else: a lower amount, a higher price, company assets tied up as security, tighter covenants or more reporting. Sole traders and partners in an ordinary partnership have no guarantee to avoid, as they are already personally liable for business debts; see sole trader loans. Borrowing of £25,000 or less by sole traders and small partnerships can be regulated consumer credit, which brings additional protections. Sometimes the better route is to borrow less, fund the need from retained profit, or introduce equity rather than accept a guarantee you are uncomfortable with.

A start-up has no trading record, so most lenders rely on the founders: a personal guarantee, a guarantor or personal security. Loans for a new business with no guarantee at all are rare. The realistic routes are:

• Government-backed Start Up Loans, which are personal loans to the founder for business use: no guarantor is needed, but you are personally liable for the loan.
• Asset finance, where the equipment or vehicle secures the agreement, sometimes without a separate guarantee for lower-risk assets.
• Invoice finance once you are invoicing business customers, where the invoices carry much of the lender's risk.

Advantages of borrowing without a guarantee: your personal assets are not directly exposed and the business stands on its own. Disadvantages: fewer lenders, smaller amounts, higher rates or more security over the business. See start up business loans for the options open to new businesses.