A personal guarantee is your promise to repay a business loan yourself if your company can't. If the lender calls it in, your savings and property, including your home, can be at risk. Before signing, check whether it's capped, whether it covers only this loan, and how you get released from it.
If you run a limited company, the company is legally separate from you. Its debts are its own. That protection is exactly why lenders ask for personal guarantees: they want someone with assets to stand behind the loan if the company can't pay.
Signing one is normal, and often unavoidable for smaller businesses. But it's a serious legal commitment, and it's worth understanding before you put your name to it.
What a personal guarantee is
A personal guarantee (PG) is a legal promise, signed by you as an individual, that you'll pay the lender if your business doesn't. It's usually a separate document from the loan agreement itself.
Lenders ask for them on most unsecured business loans to limited companies and LLPs, and often on asset finance, invoice finance and merchant cash advances too. Sole traders and partners don't usually sign one for their own business borrowing, because they're already personally liable for its debts.
A guarantee can be:
- Unsecured, meaning it's just your promise. The lender has no charge over your property on day one.
- Secured, meaning it's backed by a charge over a specific asset, usually your home.
Even an unsecured guarantee can reach your home. If the lender calls it in and you don't pay, it can take you to court, get a judgment, and then apply for a charging order over your property. In the worst case, it could seek your bankruptcy.
Limited and unlimited guarantees
This is the most important thing to check.
| Limited guarantee | Unlimited guarantee | |
|---|---|---|
| Maximum you can owe | A fixed cap, such as £25,000 or a share of the loan | The full debt, plus interest and the lender's costs |
| What it covers | Set out in the document | Often everything the company owes that lender |
| Your risk | Known in advance | Can grow over time |
Watch for "all monies" wording. An all-monies guarantee covers everything the company owes that lender, now and in the future, not just the loan you're signing for today. If the company later takes an overdraft or a second loan from the same lender, your guarantee may cover that too, without you signing anything new. If you can, ask for the guarantee to cover only the specific loan.
Joint and several liability
When two or more directors sign the same guarantee, it's usually joint and several. That means the lender can claim the full amount from all of you together, or from any one of you alone.
In practice, the lender often goes after whoever has the most assets. If that's you, you pay the whole amount, and then it's up to you to recover the other directors' shares from them. If they can't or won't pay, you bear the loss.
An illustration. Two directors each own half a company and both sign a joint and several guarantee for a £100,000 loan. The company fails with £80,000 still owing. One director owns a home with plenty of equity; the other rents and has few assets. The lender can demand the full £80,000 from the homeowner. That director can then try to recover £40,000 from the other, but if there's nothing to collect, they've paid it all. This is a simplified example; the real outcome depends on the documents and the circumstances.
When a lender calls it in
A guarantee is usually called in after the business has defaulted, for example by missing payments, going into administration or liquidation, or breaching the loan's terms. The lender will normally send a formal demand to the company and then to the guarantors.
Some points that catch people out:
- The lender may not have to chase the company first. Many guarantees let the lender come to you as soon as the company defaults.
- Leaving the company doesn't end your guarantee. If you resign as a director or sell your shares, you remain liable unless the lender formally releases you in writing.
- It doesn't end on death. A claim can be made against your estate.
- The lender can usually change the loan. Most guarantees let the lender extend, restructure or add to the borrowing without asking you again. Read for this.
If a demand arrives, don't ignore it. Lenders often prefer an agreed repayment plan to court action, and you have more options if you talk early. Get legal advice straight away.
If you can't pay
If a guarantee is called in and you can't pay the full amount, you still have options. Lenders often accept a repayment plan or, sometimes, a reduced lump-sum settlement, particularly when the alternative is a long and uncertain court process. Get any agreement in writing.
If the debt is more than you can manage, free and confidential advice is available from business debt charities, and a licensed insolvency practitioner can explain the formal options. Personal insolvency, such as an individual voluntary arrangement or bankruptcy, has serious consequences: a bankrupt person can't act as a company director without the court's permission, for example. Take advice before agreeing to anything.
How to negotiate a better guarantee
Lenders expect some negotiation, especially from established businesses with good accounts. You won't always get these terms, but they're worth asking for:
- A cap. Limit the guarantee to a fixed amount or a percentage of the loan, rather than the full debt.
- Specific, not all-monies. Make it cover this loan only.
- A time limit. Ask for the guarantee to fall away after a set period, or once the balance drops below a certain level.
- Release conditions. Agree in writing what triggers release, such as the company hitting profit targets or a set number of on-time payments.
- Several, not joint and several. Ask that each director is only liable for their own share.
- Unsecured, not secured. Resist a charge over your home if the guarantee is otherwise acceptable.
A broker who knows which lenders are flexible can make a real difference here. Lender attitudes to guarantees vary a lot.
Personal guarantee insurance
Personal guarantee insurance pays part of what you owe if a guarantee is called in, usually because the business has failed. It's offered by specialist insurers.
It can soften the blow, but read the policy closely. Policies typically cover a percentage of your liability rather than all of it, may have a waiting period before cover starts, and usually exclude situations the business already knew about when the policy began. Weigh the premium against the risk and the protection on offer.
Get independent legal advice
A guarantee is a legal document, and it's worth paying a solicitor to read it. Ask them to explain the maximum you could owe, what it covers and how you get released.
Lenders often require independent legal advice, especially when the guarantor isn't involved in running the business, such as a director's spouse or partner. In those cases the lender will usually want a solicitor to confirm they've explained the risks to that person on their own.
Common mistakes to avoid
- Signing without reading it. Guarantees are often handed over at the end of a long process. Take the time.
- Assuming it covers only this loan. Check for all-monies wording.
- Thinking resigning gets you off the hook. You need a written release from the lender.
- Not telling your partner or family. If your home could be at risk, the people you live with should know.
- Forgetting old guarantees. Keep a list of every guarantee you've signed, and ask for releases when loans are repaid.
If you've had to give guarantees because of a weak credit record, see our guide to bad credit business loans.
Questions people ask
Can a lender take my house if I signed a personal guarantee?
It can, in the end. If the guarantee is secured on your home, the lender can enforce that charge. If it's unsecured, the lender would need to take you to court first, but it could then get a charging order over your home and, in some cases, an order for sale.
Can I get a business loan without a personal guarantee?
Sometimes. Asset finance and property-backed lending may not need one, and established companies with strong accounts can sometimes negotiate it away. For most unsecured loans to smaller limited companies, lenders will ask for one.
Does a personal guarantee affect my credit score?
Signing one usually involves a search of your personal credit file. The guarantee itself doesn't normally show as a debt on your file. If it's called in and you don't pay, a County Court Judgment against you would show and would damage your credit.
What happens to my guarantee if I leave the company?
It stays in place unless the lender formally releases you in writing. Resigning as a director or selling your shares doesn't end it. Ask for a release as part of any exit, and get it in writing.
Is a personal guarantee regulated by the FCA?
Guarantees for loans to limited companies are generally unregulated, so you don't get the protections that apply to consumer lending. That's why reading the document carefully and getting independent legal advice matters so much.
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This guide is general information, not financial advice. Rates, rules and lender criteria change, so check the details with your broker or lender before you sign anything. Lending Lenny is not a lender.
