Personal Guarantee Insurance

A Personal Guarantee is a legally binding agreement that a director will personally repay a debt if the associated company fails to meet its financial obligations in relation to the debt.

Understanding Personal Guarantees

Personal Guarantees: What Every Director Should Know

Personal guarantees include:

• Secured Personal Guarantees - these are guarantees secured against specific assets such as properties 
• Unsecured Personal Guarantees - these personal guarantees are based solely on your creditworthiness
• Joint and several - these guarantees make multiple guarantors liable for the debt (e.g. a guarantee taken by several directors) 

Lenders use personal guarantees to minimise risk when lending to companies. They are often used by lenders when dealing with new businesses, businesses with limited credit history, or when providing significant loans.

A personal guarantee works by tying a business loan to the individual(s) behind the company. While the business is expected to repay the borrowing, the director or owner agrees to step in if it can’t. This gives the lender a fallback, allowing them to seek repayment from the individual rather than relying on the business alone.

A personal guarantee doesn’t necessarily attach to specific assets, and can put overall personal wealth at risk. Lenders can pursue a range of personal assets if the guarantee is enforced. Typical assets pursued include properties, savings, investments, vehicles and other high-value items. It is worth noting that a lender typically has to take legal action before seizing personal assets.

Personal guarantees are not a requirement for all business loans, but they are common.

Do You Need to Sign a Personal Guarantee when Starting a Business?

Signing a personal guarantee puts a person’s personal assets at risk by making them personally liable if they’re unable to fulfil the financial obligations of the loan. Personal guarantees can also pose a risk to credit score. If a person is unable to repay promptly, it can damage credit score and impact ability to borrow in future. Additionally, there is a risk of incurring legal costs if court proceedings associated with the enforcement of debt occur.

8 Common Concerns When Signing a Personal Guarantee

It is highly advisable to seek legal advice before taking and signing a personal guarantee. By taking legal advice, you can gain a better understanding of the guarantee and reduce the risks of the likes of unfair or hidden terms and clauses.

Personal Guarantee Insurance (PGI) is a key option for mitigating the risks of a personal guarantee. PGI is designed to protect business owners/directors’ personal assets at risk with a personal guarantee. PGI can cover up to 80% of a loan amount, helping to protect personal assets if a business faces financial difficulties.