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Risks & Rewards of Signing a Personal Guarantee as a Start-Up Company

Posted by Todd Davison on Mar 15, 2024 12:30:00 PM

Imagine you’re launching your business – a passion project that’s been brewing in your mind for years. You have the idea, the plan, and the drive to make it happen, but when it comes to securing the financing needed to turn your vision into reality, you hit a brick wall.

Whether it’s expanding your operation, leasing a property or upgrading your technology, these growth strategies often require financial backing.

This scenario is all too familiar for many business owners. Banks and lenders often need assurances before they’re willing to offer financing, especially to new ventures without an established record.

This is where a personal guarantee comes into play – a term that can sound both promising and daunting at the same time.

In this blog, we’ll delve into the ins and outs of personal guarantees and the importance of utilising personal guarantee insurance to mitigate risks to you and your assets.


Understanding personal guarantees

A personal guarantee is an agreement where the business owner pledges their personal assets as collateral to secure a loan or line of credit for their business. This means that if the business is incapable of making repayments, the owner will be responsible for covering the costs using their personal assets.

It’s common for fledging businesses to require financing to cover the costs of:

  • -Start-up expenses such as inventory and new equipment
  • -Operational costs, like rent and utilities
  • -Fluctuating cash flow
  • -Marketing and promotion, such as advertising and campaigns

A personal guarantee is one of the most effective ways to gain access to this crucial funding. By providing lenders with the assurance that their personal assets are at stake, business owners increase the likelihood of loan approval.


What are the benefits of a personal guarantee?

As mentioned earlier, by increasing the confidence of the lender, personal guarantees can help business owners gain access to financing options that are not usually on the table for fledging enterprises, leading to loan approvals and lines of credit.

Additionally, a personal guarantee can lead to lenders offering more favourable terms, such as lower interest rates, a larger loan amount, or more flexible repayment options.

Another significant benefit of a personal guarantee is that it can be a useful tool to help your business establish its credit history.

When a business owner or director takes personal responsibility for a loan and demonstrates a willingness to take on a financial risk, it shows they truly believe in their business. This helps to gain the trust of lenders, leading to funding opportunities in the future.


What are the risks of signing a personal guarantee?

While there are many benefits to signing a personal guarantee, there are also present several risks.

Perhaps the most significant risk is the exposure to personal financial liability.

When business owners pledge their personal assets as collateral, they effectively take on the debt if the business fails to repay the loan. This means that in the event of business insolvency or default, creditors can pursue the business owner’s personal assets to cover the outstanding debt.

This includes whatever tangible assets you might use to secure the loan, including savings, property, possessions such as vehicles, or any other investments you possess.

Not only can this have a huge impact on personal financial stability, but the constant worry of business failure and its potential financial repercussions can take a toll on the mental well-being of business owners.

Knowing that your personal assets are on the line can lead to heightened anxiety, sleepless nights and strained relationships, drastically altering your quality of life.

Aside from this, another risk associated with personal guarantees is how it can affect a business owner’s credit score. Late payments, defaults or bankruptcy filings associated with the business can damage your creditworthiness, making it a challenge to secure financing for personal endeavours such as mortgages, auto loans or credit cards.


How to mitigate the risks with personal guarantee insurance

Weighing up the pros and cons, it can take time to decide whether to use a personal guarantee to access crucial funding, with some business owners hesitant to take on debt or risk their assets.

However, there is a measure you can take that will allow you to see the business benefits of a personal guarantee while safeguarding you and your assets.

It’s called personal guarantee insurance.

Personal guarantee insurance policies are designed to protect business owners or directors who have provided personal guarantees to secure financing.

In the event that the business is incapable of meeting its financial obligations, and the lender pursues the personal guarantee to hold the business owner liable for the outstanding debt, the insurance covers a substantial percentage of the value of the assets.

While no one starting a new business wants to think about what could go wrong, it’s hard to ignore the statistic that on average nearly 20% of new businesses fail within their first year, and for this reason it’s always better to be safe than sorry.

Planning ahead and utilising personal guarantee insurance means that you can pursue financing opportunities to invest in the growth of your business with peace of mind, knowing that you and your assets are protected.


The importance of choosing the right PGI provider

When it comes to personal guarantee insurance, it’s important to choose a trustworthy and reliable provider.

Purbeck is the leading provider of personal guarantee insurance in the UK, offering policies that cover up to 80% of the value of your assets, from new and existing personal guarantees.

Our policies are supported by Markel International Insurance Company Limited, rated by A.M. Best (A), Fitch (A+), and S&P (A).

We’re also authorised by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential Regulatory Authority, ensuring that we always comply with the highest industry standards.

We understand how much is at stake for business owners when it comes to their personal guarantee. That's why we provide our clients with essential resources such as detailed guides, key information and survey results to help them make informed decisions about their personal guarantee insurance, lending valuable support and expertise alongside reliable policies.


Gain peace of mind with personal guarantee insurance from Purbeck

To find out more about our services, don’t hesitate to get in touch with a member of our friendly and professional team today. We’re on hand to help.

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