What is a personal guarantee and do lenders actually call them in?

A personal guarantee is a contract between a creditor, usually a lender, and an individual, normally a director or shareholder of a company.

Commercial lenders, such as banks, require the individual/s to sign a personal guarantee that certifies they will be personally liable for any company debts that go unpaid.   The personal guarantee is used by the lender as a form of security to minimise their risk when offering finance to a company. 

Unfortunately for the individual, should a company get into financial difficulty, lenders do call in personal guarantees.  The personal guarantee is there for a reason. The lender is unlikely to ignore a personal guarantee when they can recover some or all of their losses from the individual’s estate; this does include their home.

Why sign a personal guarantee?

When applying for business finance the only reason an individual would normally sign a personal guarantee is because without the personal guarantee it is unlikely many lenders would offer the finance.

When a company cannot or chooses not to fund its future plans through available cash flow it will look for alternative sources of finance.

Lenders are in the business of making money.  Commercial Lenders make money by offering finance to such companies.  A lender will offer finance to those companies it believes will be able to repay the finance.

We all know that no company is in complete control of it’s future.  A company may suffer trading difficulty through no fault of it’s own.  Lenders know this too, that is why they will reduce their risk by requesting additional security from individuals within the business.

Signing a personal guarantee requires serious consideration

Whilst owner managers of companies tend to fall into the category of natural risk takers, successful individuals tend only to take calculated risks.  Such individuals are aware of the responsibilities of running a business but also of the limited control they have over their future. 

It is one thing being responsible for your own livelihood and that of your co-workers, it is another thing altogether knowing that your family’s future is implicitly tied into the success or failure of the business. 

Removing some of the stress out of signing a personal guarantee

If you wish to access the best available finance for your business, whilst it is often impossible to avoid signing a personal guarantee, in some circumstances it is now possible to reduce your personal risk with the purchase of a personal guarantee insurance policy.  These policies will offer varying levels of cover dependent on individual circumstances. In the event of a business becoming insolvent they will reimburse the lender a proportion of the amount personally guaranteed by the insured individual.

So irrespective of the individuals attitude to risk it is always worthwhile weighing up the risk of signing a personal guarantee against the cost of offsetting some of that risk with a personal guarantee insurance policy.

Purbeck Insurance offers such cover tailored to individual requirements.  Multiple directors may be included on a policy and more than one guarantee may be added to a policy. 

It is a very simple and quick process to obtain a quotation by either following the link below or by calling one of Purbeck’s business specialists on the number provided.