When your small- or medium-sized business takes out an unsecured business loan, the lender may ask you for a personal guarantee (sometimes called a directors’ guarantee). This is a commitment where you, as the business owner or director, take personal responsibility for repaying the loan if your business cannot.

At first glance, this might sound quite terrifying. Many business owners mistakenly think that signing a personal guarantee gives lenders direct access to seize personal assets like their family home.

This is such a common misconception that a Purbeck Personal Guarantee Insurance survey found that around 45% of business owners back away from finance if a personal guarantee is involved.

Let’s dispel the myths and clarify how personal guarantees actually work.

What is a personal guarantee?

A personal guarantee is a legally binding agreement where you, as the business owner or director, agree to personally repay the loan if your business defaults. Unlike secured loans that require business assets as collateral, a personal guarantee is a promise — not an asset-backed assurance.

A personal guarantee does not mean your home will be acting as security for the loan. The loan will likely still have a higher interest rate than a secured loan, because a personal guarantee is a promise, not an offer of collateral.

What happens if I can’t repay the loan?

If your business repeatedly struggles to make repayments, lenders will often work with you to find a manageable solution rather than rushing to enforce the personal guarantee.

You’ll be first asked to enter a voluntary arrangement with the lender to repay the debt over smaller, manageable payments.

You could also work with a broker like Risecap to restructure your business debt via other products and lenders: Get a free debt health check here.

However, if the business ultimately folds or cannot meet its obligations, the personal guarantee means you cannot walk away from the debt. In such cases, you’ll need to negotiate with the lender to determine repayment options. This could involve taking out additional personal lending, such as a second mortgage, or selling personal assets, like property or investments, to cover the debt.

If you take out a personal guarantee jointly with others, you are each responsible for repaying the entire debt.

Alternatives to business loans with personal guarantees

Ultimately, most unsecured business loans will require a personal guarantee. If you choose to go down this route, we can introduce you to providers of personal guarantee insurance. This insurance can offer peace of mind, ensuring you have financial support if the guarantee is ever activated.

We can also guide you through alternative financing options that don’t require a personal guarantee, such as credit lines or trade facilities. As specialists in crafting bespoke, flexible funding solutions for UK businesses, we’re here to help. Contact us today to explore your options and secure the funding your business deserves.

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