Does a personal guarantee affect your credit score or a mortgage?

Signing a personal guarantee doesn't affect your credit score on its own. It is a promise to pay if your company can't, not a loan in your name, so it isn't normally reported on your personal credit file while the business keeps up its repayments, and it doesn't normally get in the way of a mortgage or moving house. It only shows if the lender searches your file when you apply, or if the business defaults and you can't meet a call on the guarantee.

It is usually the first thing directors ask us when a lender's offer comes back with a guarantee attached, often because they are about to move house or remortgage. Here is what actually happens.

01What is a personal guarantee?

When a limited company or LLP borrows, the company is the borrower and the debt sits on the company's credit file. Because the company is a separate legal person, lenders often ask its directors for a personal guarantee: a promise that they will repay the lender if the company cannot. Guarantees are standard on unsecured business loans and common on working capital loans, VAT loans, corporation tax loans, asset finance and acquisition finance. The different types are set out in our personal guarantees guide.

Where two or more directors sign, the guarantee is usually joint and several, so the lender can ask any one of you for the full amount. Say two directors guarantee a £150,000 loan: the lender doesn't have to split a claim £75,000 each, it can pursue whichever of you it chooses for the lot. Some guarantees are capped at a set figure; others cover the whole debt plus interest and costs. UK Finance, the banking trade body, publishes a short guide to personal guarantees worth reading before you sign.

02Does signing a personal guarantee affect your credit score?

No, not on its own. A guarantee is a contingent liability: you only owe anything if the business fails to pay and the lender calls on it. It isn't a credit account in your name, so it isn't normally reported to the credit reference agencies and doesn't change your score while the loan runs normally.

Two things linked to the guarantee can appear on your personal file:

• The lender's credit check when the business applies. Lenders usually check the personal credit of the directors who will guarantee. Depending on the lender this is a soft search, which only you can see, or a hard search, which other lenders can see for a period. One search has little effect; several close together can.
• A guarantee that is called and not met. If the business defaults, the lender can demand payment from you. If that demand goes unpaid and the lender takes court action, the result is a county court judgment against you personally (a decree in Scotland), and that does go on your file.

A few lenders also report the company's loan against the directors who guarantee it. Lenders differ on this, so if it matters to you, ask before you sign. We check this before we put a case to a lender, so it is never a surprise. If you want to see your own file first, you are entitled to a free statutory report from Equifax, Experian and TransUnion; the Information Commissioner’s Office sets out how to ask. For the wider picture, read whether a business loan affects your personal credit and how to improve your credit score before applying.

03Will a personal guarantee affect a mortgage or moving house?

While the business is up to date with its repayments, it shouldn't. A mortgage lender's credit search on you won't normally find the guarantee, and because it isn't a monthly payment you make, it doesn't reduce what you can borrow in the lender's affordability sums. The same applies to a remortgage, a product switch or a further advance on your home. If an application form asks whether you have given any guarantees, answer it accurately.

Most directors of owner-managed companies have signed at least one guarantee, and mortgage lenders know it. What mortgage lenders look at more closely is your income: if you are paid by your own company, they will usually want your company accounts or tax calculations.

Buying property for the business is different: that is business borrowing, covered on our commercial mortgages page.

04When can a personal guarantee affect your credit?

A guarantee only starts to affect your personal credit if the business's loan goes wrong and you can't meet the lender's demand. Lenders generally talk to the business first, and a formal demand is often followed by an attempt to agree an affordable repayment plan before any court action. Ringing the lender the moment you see a problem coming does more to protect your own credit file than anything else. If repayments are getting tight, these are the options.

In England and Wales, a county court judgment stays on record for six years unless you pay it in full within a month (GOV.UK). Registry Trust keeps the official register and covers how a judgment can be removed early. Scottish courts work differently; Citizens Advice Scotland walks through what happens there. A judgment doesn't end your borrowing either: some lenders still lend with a CCJ.

Sole traders and partners in an ordinary partnership are different. There is no separate borrower to guarantee, so the borrowing is your own and is usually recorded on your personal file from the start. That is one of the real differences when you are weighing up sole trader or limited company, and it is why sole trader loans are assessed on your personal credit.

Most directors of owner-managed companies have signed at least one guarantee, and mortgage lenders know it.

05What is personal guarantee insurance?

Personal guarantee insurance protects directors who have guaranteed business borrowing. If the business can't repay and the lender makes a formal demand, the policy pays an agreed share of what you personally owe, up to its limit. Cover is usually partial, there is often a waiting period before you can claim, and premiums depend on the amount guaranteed and the business's position, so it is worth looking at when the loan is arranged rather than later. Specialist insurers provide it; we arrange finance and don't give insurance advice.

06Before you sign a personal guarantee

• Read the guarantee itself, not just the loan offer. Check whether it is capped, whether it is joint and several, and whether it covers only this loan or all your company's borrowing with that lender (an "all monies" guarantee).
• Ask whether it can be limited. On stronger cases, some lenders will cap a guarantee at a share of the loan, take security over an asset instead, or lend under the Growth Guarantee Scheme.
• Take independent legal advice if you are unsure. Many lenders recommend it, and some require it.
• Ask how the lender checks your credit, soft or hard search, and whether it reports the loan on your file.
• Check how you can be released if you later leave the business, which matters on a director buyout. A guarantee usually stays in place until the lender agrees to release you.
• Look at the alternatives. Some lenders offer business loans without a personal guarantee.

Smart Funding Solutions is a whole-of-market broker, not a lender. We approach suitable lenders on your behalf, explain what each one will ask you to sign and avoid scattering credit searches across lenders who are unlikely to say yes. If you want to know what a lender will look at first, read how lenders assess business loan applications, or see what our clients say in their reviews. When you are ready, get your instant quotes to see which lenders on our panel fit your business, with no credit check.