As a director of a growing company, you’re constantly looking for opportunities to maintain your upward momentum. So when a lucrative new project is within reach, you need to act fast to secure it. But what if you need a quick injection of capital to purchase materials or cover labour costs before the contracts are finalised?
Traditional lending avenues are often slow and weighed down by red tape, which leads many directors to explore faster, more flexible alternatives, such as raising funds through a loan note.
Loan notes can be a golden ticket in moments like this, but these agreements come with a catch: they require a personal guarantee. That means your personal assets, including your home and savings, could be on the line if your company is unable to repay the loan.
Many directors take this risk without fully considering the consequences. That's where personal guarantee insurance (PGI) comes in.
In this blog, we'll explore how loan notes work and how you can protect yourself and your assets with the right insurance in place.
What are loan notes, and when are they used
A loan note is essentially a formal IOU. It outlines how a loan will be repaid, covering the capital amount, interest payable, and repayment timelines.
Unlike traditional bank loans, loan notes can be tailored to suit the lender's and borrower's needs, making them a popular tool in non-traditional finance agreements.
You’ll often find loan notes used in scenarios like:
- Shareholder or director loans
- Private investment into early-stage or high-growth businesses
- Management buyouts (MBOs) or acquisitions
- Convertible loan note agreements during fundraising rounds
Loan notes can be secured, using company assets as collateral, or unsecured, in which the lender has no claim over the business's assets.
In the case of an unsecured loan note, a personal guarantee from the director or shareholder becomes a vital part of the agreement.
For many SMEs, loan notes are the ideal solution when bank funding isn't an option, whether due to time constraints, credit criteria, or a need for bespoke repayment terms.
The role of personal guarantees in loan notes
A personal guarantee is a legal pledge made by a company director or business owner to personally repay a loan if the business can't. This means that if a loan note is involved and your company defaults, the responsibility to repay the debt falls directly on you.
This shifts the risk from the business to the individual. Many private or alternative lenders ask for a personal guarantee as an added layer of security, especially when the loan note is secured.
If your business can’t repay the loan, there can be serious consequences for the director involved, including:
- Personal bankruptcy
- Loss of assets like your home, savings, or pension
- County Court Judgements (CCJs) or other legal action.
Worryingly, many directors sign personal guarantees without fully understanding the financial risk involved or without seeking legal advice.
How personal guarantee insurance works with loan notes
PGI is a specialised type of insurance designed to protect you, the director, not the business if a personal guarantee is called in.
If your loan agreement includes a personal guarantee, PGI can be arranged from the outset. However, it’s important to note that a PGI doesn’t remove your legal obligation.
The benefits of using PGI when entering a loan note agreement
Using PGI alongside a loan note isn't just about risk reduction; it's also a smart business decision that brings a host of benefits.
Protects personal wealth and future security
PGI shields directors from devastating personal losses if the business defaults, protecting your home, pension, and joint assets.
Supports bold, growth-focused decisions
Whether you’re acquiring another business or investing in a major project, PGI gives you the freedom to act decisively without risking everything you own.
Reduces stress
Carrying the weight of personal liability can be mentally and emotionally draining. PGI provides peace of mind so you can focus on growing your business without worrying about worst-case scenarios.
Improves funding access and deal terms
Lenders often view PGI as a sign of responsible planning and risk management, which improves trust and makes your funding proposal more appealing.
Adds value for advisors and brokers
Recommending PGI strengthens your client relationships and shows you’re going the extra mile to protect their long-term interests.
Why choose Purbeck
At Purbeck, we believe in giving directors the tools and confidence they need to grow their businesses safely.
With more than 2,0000 directors already protected, we’re the leading PGI provider in the UK, trusted by brokers, legal advisors and accountants nationwide.
Our clients rely on us for:
- Personalised quotes tailored to your loan agreement
- Expert customer service and transparent terms
- Legal and claims support if enforcement action is taken
- Up to 80% protection for personal guarantees
- Cover for loans up to £550,000 with monthly premiums from as little as £50
Protect your future with Purbeck
If you're considering a loan note backed by a personal guarantee, don't leave your personal assets exposed.
With PGI from Purbeck, you can move forward with the funding your business needs without putting everything you've worked for on the line.
For more information, don’t hesitate to get in touch with our expert team today.
