What is a personal guarantee on a business loan?

A significant portion of business lending is through unsecured loans - these often require a personal guarantee. This article looks at what they actually are and their pros and cons.

If you’re considering applying for business finance, you will probably have come across the term personal guarantee. Personal guarantees are a significant factor in the business funding application process and a key consideration for major shareholders and company directors looking at their finance options.

While it can sound daunting and somewhat off-putting, it helps to understand what a personal guarantee actually means in practise.

Personal guarantees in a nutshell

Personal guarantees are often required, or preferred, in a wide range of funding scenarios from bank loans to invoice finance facilities. Put simply, giving a personal guarantee means you as a business owner or director will be held personally liable if the business can’t pay what it owes, therefore allowing the lender to pursue you personally if your company defaults on its loan.

As well as minimising risk to the lender, a personal guarantee is a strong indicator that you have confidence in your business and are willing to take on some personal risk. While this may seem a daunting prospect, in some cases it can mean the difference between the success and failure of your finance application.

How personal guarantees work

It’s important to remember that a personal guarantee only comes into play if your business fails to repay its debt, so your obligation is secondary to that of the business.

Personal guarantees on business loans can come in various shapes and sizes. For example, the lender may seek a personal guarantee for the full amount borrowed, or a capped proportion. Lenders will also look at your overall net worth, including factors such as your credit history and assets.

Sometimes personal guarantees are supported by additional security, such as a charge over your home, but for the most part they are ‘unsecured’ and based on your overall net worth.

Main points to consider

The difference between a ‘yes’ and ‘no’ – Although you may not be comfortable with the thought of a personal guarantee, it could improve your chances of accessing finance, especially if your business case isn’t strong enough on its own. Personal guarantees might just provide the extra reassurance needed to tip the balance in your favour.

Raise more capital – Your business on its own may not be able to raise the full funds you need, so adding a personal guarantee into the equation could result in the lender loaning you a higher amount.

Useful for new businesses – If you’ve launched a new business with no trading history, you’re unlikely to get an unsecured loan on that basis. It might be possible though if you have sufficient personal assets to ‘secure’ the loan via a personal guarantee.

Final thoughts on personal guarantees

Personal guarantees can be a very useful method of securing vital business finance that you wouldn’t otherwise have been able to get, and could therefore mean the difference between the success and failure of your business. It may be that a funding injection from a third party is vital to the growth of your company.

However, it is crucial to weigh up all the pros and cons and explore the alternative funding options available to you before entering into an agreement. Remember, if the worst were to happen and your business defaulted on its loan, it could have serious consequences for your personal finances and status.

Specific terms vary so make sure you seek legal advice and carefully check you are comfortable with all the terms and conditions before signing anything. Focus on establishing what commitments you are making, and what the potential consequences of those would be — then you will be armed with all the facts to make an informed and measured decision on what’s best for both you and your business.

Conrad Ford is Chief Executive of Funding Options

Further reading on a personal guarantee

Owen Gough, SmallBusiness UK

Owen Gough

Owen was a reporter for Bonhill Group plc writing across the Smallbusiness.co.uk and Growthbusiness.co.uk titles before moving on to be a Digital Technology reporter for the Express.co.uk.

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