Picture this:
James has spent years building his small artisan coffee business, known for its rich, locally roasted blends. With demand growing and cafes and restaurants eager to stock his beans, he knows it's time to expand – investing in larger equipment, hiring an extra pair of hands, and finally moving out of his cramped studio.
When the bank approves his business loan, it feels like his dream is within reach, but there’s a catch: they require a personal guarantee.
Excitement quickly turns to worry as he signs the paperwork, knowing that his own home and savings could be at risk if the business struggles.
It's an all too familiar scenario for many business owners eager to transform their company: You need the funding to ensure business growth, but the risks that come with a personal guarantee constantly weigh on the back of your mind.
This is where personal guarantee insurance (PGI) comes in – a financial safety net designed to protect ambitious business owners like James.
In this blog, we’ll explore how PGI provides peace of mind for entrepreneurs, allowing them to take calculated risks without the fear of personal financial loss.
What is a personal guarantee?
A personal guarantee is a legal commitment where a business owner or director personally agrees to repay a loan if their business is unable to do so. While this can be the ticket for securing funding, it also places the guarantor’s personal assets, such as their home, savings, and investments, at significant risk.
For small and medium-sized businesses (SMEs), personal guarantees are often necessary to access funding for expansion, equipment purchases, or cash flow support.
However, signing a personal guarantee means taking on personal liability, which can have serious financial consequences if the business struggles to repay its debts.
The key to navigating this risk is understanding how to protect yourself while still securing the funding needed for business growth.
What are the risks of a personal guarantee?
While personal guarantees help businesses access essential funding, they also come with significant risks:
- Personal liability – If the business defaults, the guarantor is responsible for repaying the outstanding debt.
- Impact on personal finances – Defaulting on a personal guarantee can damage personal credit scores and lead to legal action.
- Enforcement by lenders – Lenders have the legal right to pursue personal assets, including property and savings, to recover unpaid amounts.
- Unlimited exposure – Some personal guarantees are uncapped, meaning there is no limit to how much a guarantor may have to repay.
These risks can place a huge financial and emotional burden on business owners.
How to reduce the risks of a personal guarantee
If you’re considering signing a personal guarantee, there are several ways to protect yourself from potential risks:
- Limit your guarantee – Where possible, negotiate a capped guarantee rather than an unlimited one. Setting a maximum liability ensures you won’t be held responsible for more than you can reasonably afford.
- Seek personal guarantee insurance – A personal guarantee insurance (PGI) policy, such as those offered by Purbeck, can cover a significant portion of the outstanding loan if the guarantee is called on.
- Share the responsibility – If your business has multiple directors, consider splitting the guarantee among them. This reduces the financial burden on any one individual.
- Understand the full terms – Always read the fine print carefully. Pay special attention to clauses like "joint and several liability", which could make you liable for the entire debt, even if other guarantors exist.
- Monitor your business’s financial health – Staying on top of cash flow, revenue, and debt obligations reduces the risk of default, helping you avoid the need to rely on your personal guarantee in the first place.
By taking these steps, you can balance accessing the crucial funding you need and protecting your finances.
How personal guarantee insurance can mitigate the risks of business growth
When it comes to business, you never truly know what’s around the corner. While your company might be flourishing in this quarter, it could end up floundering in the next, which is why you need to be prepared.
That’s where personal guarantee insurance comes in.
PGI is a specialised policy designed to protect business owners and directors who have used personal guarantees to secure funding, covering a significant portion – up to 80% - of the outstanding debt amount.
Cover is available for various finance types, including secured and unsecured loans, asset finance, commercial mortgages, business credit cards and overdrafts, with flexible and tailored terms depending on your unique requirements.
This means that no matter what struggles your business may experience, you can continue with peace of mind.
An ideal solution for startups, SMEs, and businesses looking to expand, PGI acts as a well-needed safety net that allows you to pursue business growth without putting your personal assets entirely on the line.
Why choose Purbeck
Signing a personal guarantee is a huge step for you and your business, and the stress of losing personal assets and the potential for financial ruin can keep you up at night.
That’s why you need PGI – and a provider you can trust.
At Purbeck, we understand the weight of this responsibility. As the UK’s leading provider of PG insurance services, our policies are designed to shield up to 80% of the value of your asset used to secure your personal guarantee.
Our flexible cover is designed to fit your needs, whether you’re a startup, an SME, or an established company looking to expand. Plus, with our exclusive support services, including expert guidance, debt management assistance, and business mentoring, you’ll have expert help when you need it most.
Your business ambitions don’t have to come at the cost of your personal security. Get in touch with our team today and let us help find the right cover for you.
