Understanding personal guarantees

What is a personal guarantee?

A personal guarantee is a legal promise to repay borrowing if the business can’t pay it back. It’s usually provided by someone who runs or owns the business. This could be a director, member, partner, or owner.

By signing it, they agree to pay the debt themselves if the business doesn’t repay the money.

Why lenders ask for personal guarantees

Managing risk - Limited companies and LLPs are separate legal entities. This means owners aren’t normally responsible for business debts. A personal guarantee gives a lender more confidence that the borrowing will be repaid in the event of the business running into financial difficulty.

Added security - If the business can’t repay what it owes, the person who provided the guarantee may have to pay the outstanding amount.

Showing commitment - Providing a personal guarantee shows that the directors, members or partners in a liability partnership believe in the business. It also shows they’re willing to make a personal promise to repay the borrowing if needed.  

When we’ll ask for a personal guarantee

• If your business is a limited company or LLP, we’ll ask for a personal guarantee as part of the finance agreement.
• If your business structure changes, new directors, members or partners in a liability partnership will also need to provide a personal guarantee.
• If you’re a sole trader or partnership, we won’t ask for one. Unlike a limited company or LLP, a sole trader or partnership’s personal assets can be pursued directly if the business defaults on their finance.
  
  

All lending is subject to status, availability, and lending criteria. We reserve the right to decline any application.  

Key things to know

Get legal advice - Make sure you understand when the guarantee could be used. An independent legal adviser can explain how the guarantee works and what your responsibilities are. Ask questions if anything isn’t clear. You shouldn’t sign a personal guarantee unless you’re completely sure you understand what you’re agreeing to and what you’re responsible for.

Know the type of guarantee – There are two main types:

• An unlimited personal guarantee – You’re responsible for the full debt, including interest, fees, and costs. 
• A limited guarantee – You’re only responsible for a set amount, which is clearly stated in the agreement. We ask for a limited guarantee.
  
  

How long it lasts  –  A limited guarantee ends when the borrowing is fully repaid, and the agreement ends. An unlimited guarantee continues until the lender releases you from it.

When we’ll ask  –  For limited companies and LLPs, we ask all directors, members or partners in a liability partnership to give a guarantee before the product is made available.

When it can be enforced – If the business misses repayments or breaks the terms of the agreement.  

Other things to think about

Carefully read the terms and conditions and key facts documents of the product you’re applying for before you apply.

Remember: a personal guarantee may put your personal assets, including any savings or your home, at risk if your business can’t repay the debt.  

Want to learn more from an independent source?

UK Finance have information to help businesses understand what a personal guarantee is, which you might find helpful. Additionally, you can find a guide on personal guarantees from the British Business Bank.