Guarantor Insurance vs Personal Guarantee Insurance

If you have agreed to act as a guarantor, you may start looking for insurance to protect yourself if things go wrong.

You may come across terms such as guarantor insurance, guarantor protection insurance and Personal Guarantee Insurance (PGI). These terms are often used interchangeably, but they can refer to different types of protection.

For business owners and company directors, the type of guarantee you have signed is what matters. If you have personally guaranteed business borrowing, such as a business loan, asset finance facility or other commercial finance agreement, Personal Guarantee Insurance is the specialist cover designed for that risk.

This guide explains what people mean when they search for guarantor insurance in the UK, how it relates to Personal Guarantee Insurance, and what directors should consider when taking on a personal guarantee.

What is guarantor insurance?

“Guarantor insurance” is a broad term used to describe insurance that may protect someone who has agreed to act as a guarantor.

The underlying arrangement can vary. Someone might be guaranteeing another person's rent, personal borrowing or another financial commitment. The type of protection available will depend on the guarantee involved.

For company directors who have signed a personal guarantee to support business finance, Personal Guarantee Insurance is designed specifically for this type of commercial borrowing.

What is Personal Guarantee Insurance?

Personal Guarantee Insurance is a specialist insurance product designed to protect business owners and directors who have signed a personal guarantee in support of business borrowing.

A personal guarantee creates a direct financial link between the individual and the business's debt. If the company cannot meet its repayments, the lender may be able to enforce the guarantee and pursue the director personally for the amount owed under it.

Depending on the terms of the agreement, this can put personal assets at risk, including:

Savings
Investments
Property and other valuable assets
Other personal wealth

PGI is designed to reduce the financial impact if that personal guarantee is called upon. At Purbeck, our Personal Guarantee Insurance policies can cover up to 80% of the personal guarantee, subject to policy terms. This means directors taking on business finance do not have to accept the full personal risk without protection.

Is guarantor insurance the same as Personal Guarantee Insurance?

Not necessarily. Guarantor insurance is a broad search term covering different types of guarantor arrangements. Personal Guarantee Insurance is specifically designed for business owners and directors who have personally guaranteed eligible business borrowing.

For example, imagine a director takes out a £250,000 business loan and the lender requires a personal guarantee. If the business later fails and cannot repay the borrowing, the lender could seek repayment from the director under the terms of that guarantee.

That is the type of commercial exposure Personal Guarantee Insurance is designed to address.

What about guarantor protection insurance?

“Guarantor protection insurance” is another term people may use when looking for cover after agreeing to act as a guarantor. As with guarantor insurance, the type of protection depends on the underlying agreement.

There is a significant difference between guaranteeing somebody else's personal financial commitment and signing a personal guarantee to support borrowing for your own company. Personal Guarantee Insurance is designed for the latter.

If you are looking for cover, check that the policy applies to the type of guarantee you have signed.

Why do business lenders ask for personal guarantees?

Personal guarantees are a common feature of SME lending. A limited company is legally separate from its directors, which generally means that company debts are not the personal responsibility of the directors. A personal guarantee creates an exception to that separation for the borrowing covered by the guarantee.

By signing one, a director agrees to become personally responsible for the relevant business debt if the company cannot repay it.

Lenders may request personal guarantees across a variety of commercial finance arrangements, including:

Unsecured business loans
Asset finance
Invoice finance
Overdrafts and working capital facilities
Commercial property finance

For lenders, a personal guarantee provides an additional level of security. For directors, it creates personal financial exposure alongside the company’s borrowing.

Who needs Personal Guarantee Insurance?

Personal Guarantee Insurance may be worth considering if you are a director or business owner who has signed, or is preparing to sign, a personal guarantee supporting eligible business finance.

It may be particularly relevant if:

The guarantee is for a significant amount
Repaying the guarantee personally could put savings or assets at risk
Borrowing is being used to fund business expansion or investment
Several directors are providing guarantees
You have personal guarantees across multiple finance arrangements
You want to reduce the personal financial risk associated with business borrowing

It is worth looking at your options when the guarantee is being arranged, rather than waiting until the business begins experiencing financial difficulty.

How does Personal Guarantee Insurance protect directors?

PGI provides cover against a proportion of the personal guarantee if it is enforced following a business default.

The exact level of protection will depend on the policy and underlying finance arrangement. At Purbeck, cover can provide protection for up to 80% of the personal guarantee, subject to the policy terms.

However, the support available goes beyond the insurance itself. Purbeck policyholders also have access to our Business Support Service, providing practical support when a business begins to experience financial pressure.

This early intervention is an important part of the protection. Directors can access support aimed at helping them understand their options and address problems before they escalate.

Can Personal Guarantee Insurance cover an existing guarantee?

In some circumstances, directors may be able to arrange Personal Guarantee Insurance for an existing personal guarantee, rather than only when taking out new finance. However, eligibility will depend on the circumstances and the financial position of the business.

As with any insurance, cover is intended for future, uncertain risks. Waiting until a business is already in serious financial difficulty may therefore limit the options available.

If you already have a personal guarantee in place, a specialist provider can explain whether cover may be available.

Choosing the right protection for your guarantee

The terminology surrounding guarantees can be confusing. Before signing any guarantee, directors should make sure they understand:

The amount they are personally guaranteeing
Whether the guarantee is capped or unlimited
How long the guarantee remains in force
Whether liability is shared with other directors
What could happen if the business defaults

Independent legal advice can also help directors understand the terms and implications of a guarantee before committing to it.

Protecting yourself when signing a personal guarantee

Personal guarantees can help businesses access finance that supports growth, investment and cash flow, but they also expose directors to significant personal financial risk, which should not be overlooked.

If you have been searching for guarantor insurance because you have personally guaranteed business borrowing, Personal Guarantee Insurance may be the type of protection you need.

At Purbeck, we specialise in Personal Guarantee Insurance for UK business owners and directors, helping protect against the personal financial consequences of business borrowing.

If you have an existing personal guarantee or are preparing to sign one, speak to our specialist team to understand how Personal Guarantee Insurance could help protect your personal assets.