Everything you need to know about personal guarantees for business loans
Using a personal guarantee can be helpful for business owners in need of finance, but it’s important to understand the pros and cons.
Struggling to get a business loan? Providing a personal guarantee that you will pay some or all of the balance should your company be unable to is one way to get one. But doing so could land you in hot water financially, so it’s vital to understand the implications.
What is a personal guarantee on a business loan?
A personal guarantee is a legally binding agreement between a bank or other lender and a business owner or director. By acting as a guarantor for a business loan, the business owner or director is agreeing to be personally liable for repaying the loan if the business becomes unable to meet its loan repayments.
It’s one way to avoid using an asset, such as the business premises, as collateral for a secured business loan.
It’s also an option for parents or grandparents to help their children buy or start up a business. However, most lenders require an individual to be a director and/or shareholder in the business to qualify as a business loan guarantor.
You should also note that a personal guarantee doesn’t always need to cover the entire loan amount. Some lenders might only ask for a personal guarantee for 20% of the sum borrowed, for example.
On very large business loans, however, they may require several personal guarantees.
These unsecured and secured loans could help you grow your business, cover running costs or even fund a new company.
When do lenders require a personal guarantee?
Startup businesses and companies with little trading history often struggle to qualify for business loans, although there is a range of specialist loans and grants for startups and small businesses.
You may also find it harder to get a business loan if:
Your company has a poor credit score
Your company is a low-income business
You need to borrow to buy an existing business with little deposit or experience
In some cases, offering a personal guarantee also enables you to benefit from lower business loan interest rates.
You can find out more about business loan eligibility with our five-minute guide: Am I eligible for a business loan?
Who can be a guarantor for a business loan?
Most lenders only accept personal guarantees from directors or shareholders of the company taking out the loan.
To provide a personal guarantee, you must also be able to convince the lender you can afford to meet the repayments should the company default – either with cash or sometimes with an asset, such as a property.
Advantages of a personal guarantee for a business loan
Here are some of the advantages of using a personal guarantee:
It can help you get a business loan – Providing a personal guarantee can help your company access the funds it needs, particularly if it is unable to qualify for a standard business loan
It can allow you to borrow more – Adding a personal guarantee can sometimes help you borrow a larger amount than you could otherwise
It can enable you to borrow at a lower interest rate – In some circumstances, lenders offer lower rates on business loans supported by a personal guarantee
A personal guarantee – from you or someone else – can therefore give you the boost you need to achieve your business goals.
Disadvantages of a personal guarantee for a business loan
The main disadvantages of using a personal guarantee are as follows:
It’s a high-risk way to borrow – The guarantor could face financial difficulties or even bankruptcy if the company fails to pay off its debts. Losses could include the guarantor’s property or other assets
It could affect your personal credit score – The guarantor’s personal credit score is affected if the company misses a payment, especially if the guarantor is also unable to pay
This is why it’s wise to take independent financial advice before agreeing to provide a personal guarantee for a business loan.
Alternatives to a personal guarantee on a business loan
There are lots of ways for companies to access business finance. Popular alternatives to using a personal guarantee include:
Startup loans, which are designed for companies with little or no track record
Angel investment, which involves attracting minority investors who believe in your business
Invoice finance, where you use the invoices you send out as security
Asset finance, which means putting assets such as equipment up as security against a loan
For more information on all the different types of business loans available, check out our guide: Types of business loans.
FAQs
What happens if my guarantor can’t pay?
Defaulting on a personal guarantee linked to a business loan has serious financial consequences. Even missing one payment has a negative impact on your credit score.
If you are unable to pay longer term, the lender will take you to court. This could result in bankruptcy and potentially losing your home and other assets, such as your car or any other businesses.
How long does a personal guarantee last?
Personal guarantees for business loans last as long as is stated in the contract between the guarantor and the lender. There may be a limitation period after which the guarantee can no longer be enforced.
However, the terms and conditions vary, so it’s important to read them carefully before signing.
What’s the difference between a director’s guarantee and a personal guarantee?
In the context of business finance, a personal guarantee is the same as a director’s guarantee. This is because lenders only generally accept personal guarantees on business loans from company directors or shareholders.
About Jessica Bown
Jessica Bown is an award-winning freelance journalist and editor who has been writing about personal finance for almost 20 years.