During their lifecycles, successful businesses will look to expand. This growth is likely to lead to the need for further investment in the company for which owners and directors may be required to give personal guarantees.

Investment requirements could take many forms, but typically there may be a need to invest in more staff, the purchase of new machinery or stock, or even funding for re-location into larger premises.

Businesses seeking this kind of investment will often go to their banks or another source of lending for funds. However, if they do not have assets with which to provide security for that finance, they will be considered a risk by the prospective lender. They may find it difficult to secure funding, unless a personal guarantee is given.

Of course, giving a personal guarantee also carries its own risks that you will need to consider before committing to one. In this blog, we will detail why personal guarantees might be needed and how you can protect yourself.

• What is a personal guarantee?
• The benefits and risks of personal guarantees
• How personal guarantee insurance can help
• Get advice

What is personal guarantee?

When a business takes out a loan, the lender will usually want some kind of assurance that repayments can be met. This is particularly apt for companies that have a poor credit history that lenders may consider risky.

In some cases, these loans can be secured against the assets owned by your company. If you struggle to pay back the loan and default on the loan, these assets can be taken by the lender to enable them to get their money back.

However, if you do not have assets that can be used as security, you may be asked to guarantee the loan personally. If you are taking out a higher value loan, a personal guarantee may be needed in addition to other security by the lender. This means that in the event that your business defaults, the lender could try to recover their costs against you personally. It is a legally binding agreement.

Personal guarantees are often used by company directors to secure finance for their business that might otherwise be unavailable. By personally guaranteeing the loan, lenders will feel more comfortable that they will get their money back from the loan, even if business circumstances change.

The benefits and risks of personal guarantees

The main benefit of a personal guarantee is that it allows your business to access finance that it might otherwise be rejected for. It also creates opportunities for firms that suffer from a poor credit history or a lack of assets to obtain funding that they otherwise wouldn’t achieve.

However, there are many risks to having one too. Personal guarantees blur the lines between your business and personal life, which many directors will not want to do.

The nature of a personal guarantee means that you could be expected to dip into your personal assets – the savings or equity you may have in your property – to pay the debt in your business. While this hopefully will not happen, it is an ongoing risk that guarantors have to accept. This can be a cause of stress and worry.

In the worst-case scenario that your business fails to meet its loan repayments, you could be left to personally pay the remaining balance owed to your lender including their fees and accrued interest. Such an event would be disastrous.

Due to the risks associated with a personal guarantee, it is essential that careful consideration is given before committing to one, or that guarantors take appropriate action to protect themselves.

How personal guarantee insurance can help

Invariably any form of borrowing above say £5-10,000 from a bank or other financial entity will require further security in the form of a personal guarantee from the business owners and directors. This is on top of any security that the lender may also take over the assets of your company.

Personal guarantee insurance (PGI) protects directors who have given a personal guarantee for a loan against loss resulting from the guarantee.

The guarantor is protected in the event of the company failing to repay its lender in full. Cover starts at 60 per cent for each guarantor of the amount of the guarantee in year one for unsecured loans. The percentage increases annually up to 80 per cent per guarantor in year three and subsequent years. For secured loans, cover is granted at 80% from day one. This protects you against the full amount of the personal guarantee that you have signed. Cover is up to a maximum of £300,000 for unsecured loans and £400,000 for secured loans.

The inherent flexibility within Personal guarantee insurance means that levels of cover can be increased incrementally to ensure that personal assets continue to be safeguarded as the company grows. Furthermore, lenders are provided with an additional layer of protection, resulting in more available borrowing. This can offer extra peace of mind for guarantors who may be anxious around putting their personal finances on the line.

Get advice

There is plenty to consider when it comes to personal guarantees and personal guarantee insurance. Personally guaranteeing a loan is risky and many people may be against doing so, but PGI can add a welcome level of protection.

If you need advice on guarantees or corresponding insurance, we can help. Our team of advisors have expertise across a range of different loan and finance types and can talk you through the possible solutions for your business.

If you’d prefer not to offer a personal guarantee at all, we’ll search the market to find the finance solution that suits you best. There may be a lender out there that doesn’t require a personal guarantee for your circumstances.

We can also take you through the implications of a personal guarantee on a loan and put you in touch with appropriate insurers to help you protect yourself.

Please call the team today for a free consultation on 0203 327 0567 or email [email protected].