Do I need to give a personal guarantee for a business loan?

A recent survey found that 60% of small business owners feel uninformed about the risks associated with personal guarantees, leading 25% to withdraw from loans that required them.

If you plan to take out a business loan and are unsure whether you’ll need to provide a personal guarantee or what the risks and rewards might be, read on to get the low down.

What is a personal guarantee for a business loan?

A personal guarantee for a business loan is a legal commitment by an individual, usually the business owner or a director, to repay the loan personally if the business can’t. It means the individual is financially responsible for the debt if the business fails or cannot meet its repayment obligations.

A personal guarantee minimises the risk to the lender by providing an extra layer of protection.

What are the risks of personal guarantees?

Signing a personal guarantee for a business loan has potential risks, including:

• Personal liability for business debts – if your business cannot repay the loan, you, as the guarantor, become personally responsible for the entire debt. Lenders can pursue your personal assets, such as savings, investments, or your home, to recover the money owed.
• Bankruptcy – if your business defaults on loan repayments and you can’t personally cover the debt, you may be declared bankrupt and face long-term financial difficulties.
• Damage to your credit score – if your business defaults on the loan and the lender takes legal action to recover the debt from you personally, it will negatively impact your personal credit score. This can make it more difficult to access finance in the future.
• Limited future borrowing capacity – when you’re the personal guarantor for a business loan, it can limit your ability to take on personal finance, such as a mortgage.

Should I provide a personal guarantee for a business loan?

Personal guarantees can open up business financing options. They can also help you secure lower interest rates and more favourable terms and may give you access to a higher funding level.

Providing a personal guarantee also demonstrates commitment and gives lenders confidence that you are standing behind your business or project. They may only be for a nominal amount – say 10-20% of the loan value, which in reality carries little risk.

If your business is new or you don’t have any business assets as security, the lender might require a personal guarantee. However, even in these circumstances, securing a business loan without a personal guarantee is sometimes possible. Here are some examples of where we’ve been able to source funding for clients without them needing to provide a personal guarantee:

• £87,500 for a 100% share purchase agreement of a hair and beauty salon in Southampton. The client had limited experience in the sector, so even though the current owner would remain in the business for a 12-month handover, finding a lender to support the finance without security wasn’t easy. However, with perseverance, we found a supportive lender and got our client the finance they needed.
• £125,000 on behalf of a charity to facilitate a move to new premises. We secured a lender that provided the finance without personal guarantees from the directors and trustees.
• £320,000, at 75% loan-to-value for a glazing company to purchase freehold trading premises; transacted through a new property holding company. We secured the finance without personal guarantees being required in respect of either company.

For over 50 years, we’ve been helping businesses of all types and sizes secure the finance they need, with or without personal guarantees. To find and secure the right deal, get in touch.