Personal guarantees on business loans: what directors need to know

A personal guarantee is a legally binding promise by a director or business owner to repay a business debt personally if the business cannot. If the company defaults, the lender can pursue the guarantor for the amount owed, which can put personal savings, property and other assets at risk. Personal guarantees are common in UK business lending, particularly for unsecured loans to limited companies.

This guide is for directors and business owners who have been asked to sign one, or expect to be. As a broker comparing a panel of 300+ lenders, Smart Funding Solutions sees how differently lenders approach guarantees, and that difference is often worth knowing before you sign. For the wider range of finance products, see our business finance guide.

01How a personal guarantee works

A limited company is a separate legal entity, so its directors are not normally liable for its debts. A personal guarantee changes that for the specific debt it covers. If the business misses repayments and the lender demands payment, the lender can take action against the guarantor directly. That may lead to a court judgment, a charge over your home or, in serious cases, bankruptcy proceedings.

Many lender documents are drafted as a "guarantee and indemnity". The indemnity element can make you liable even if the underlying loan turns out to be unenforceable against the company, which is one reason to read the document carefully.

02Types of personal guarantee

• Unlimited guarantee: you are liable for the full debt plus interest, costs and charges.
• Limited (capped) guarantee: your liability is capped at a fixed amount or percentage.
• Joint and several guarantee: where several directors guarantee the same debt, the lender can pursue any one of them for the whole amount, not just their share.
• All-monies guarantee: covers all current and future debts owed to that lender, not only one loan.
• Secured guarantee: backed by a charge over personal property, such as your home.

03When lenders ask for a personal guarantee

• Unsecured business loans and revolving credit facilities to limited companies
• Start-ups and companies with a short trading history or few assets
• Invoice finance and merchant cash advances, often as a warranty or guarantee
• Commercial leases and some supplier credit accounts
• Businesses in sectors lenders see as higher risk

For lenders, a guarantee shows that directors are committed and gives an extra route to recover money. In return, it can help businesses borrow when they would otherwise be declined. Read more about unsecured business loans.

04The risks for guarantors

• Losing personal savings or assets if the business fails
• A charge being placed on your home
• County Court Judgments and damage to your personal credit record if you do not pay when called on
• Liability continuing after you leave the company, unless you are formally released
• Strain on personal and family finances

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05How to negotiate a personal guarantee

• Cap the amount: ask for a limit below the full loan value.
• Limit the time: ask for the guarantee to reduce or fall away as the loan is repaid or after a period of good trading.
• Restrict the scope: avoid all-monies wording if the guarantee should cover only one facility.
• Offer business security instead: equipment, property or invoices may reduce the need for a guarantee.
• Clarify release: agree what happens if you leave the business or sell your shares.

Lenders will not always agree, but they often have some flexibility, especially for stronger applications. A broker can compare lenders whose guarantee requirements differ.

06Reducing your risk

• Take independent legal advice before signing. Some lenders require it.
• Consider personal guarantee insurance, which specialist insurers offer to cover part of your liability if the guarantee is called on. We do not give insurance advice, so read the policy terms and take advice from the insurer or an insurance adviser.
• Keep track of every guarantee you have given, including their limits.
• Monitor the business closely so you can act early if trading deteriorates.
• Talk to the lender early if repayments become difficult. Lenders generally prefer an agreed plan to enforcement.

Lenders will not always agree, but they often have some flexibility, especially for stronger applications.

07Legal points to understand

In England and Wales, a guarantee must be in writing and signed by the guarantor to be enforceable. Time limits for a lender to bring a claim depend on how the document is executed (a guarantee signed as a deed generally has a longer limitation period) and on when the lender makes its demand. Acknowledging the debt or making a payment can affect those time limits. Scotland and Northern Ireland have their own rules. Because the details matter, take legal advice on your specific document.

08Alternatives to a personal guarantee

• Asset finance: the equipment itself is the main security, though guarantees may still be requested.
• Secured business loans: business property or assets instead of, or alongside, a guarantee.
• Government-backed lending: under the Growth Guarantee Scheme, lenders cannot take a borrower's principal private residence as security for a personal guarantee. Check the British Business Bank for current scheme rules.
• Equity investment: no repayments or guarantees, but you give up a share of ownership.

If you want to borrow with the lightest guarantee requirements available for your circumstances, we can compare lenders whose terms differ and explain the guarantee wording in each offer before you commit; you should still take your own legal advice. It is free to enquire, and any broker fee is disclosed separately before you proceed.