Understanding Personal Guarantees: What Every Director Should Know

Imagine getting a call that your family home, the place you’ve poured your savings into, raised your family and planned to retire in, is being used to cover a debt your business can’t repay.

A key client defaulted, or cash flow dried up, and now, because of a document you signed years ago you’re personally on the hook.

Personal guarantees can feel like a formality at the time. Just another piece of paperwork to keep things moving, but when things go wrong, they can expose your most valuable personal assets, including your home and your future financial stability.

Whether you're signing one for the first time or worrying over old agreements, understanding the risks is essential not just for your business but for your peace of mind. In this blog, we explore the risks personal guarantees pose to directors and how you can protect yourself from the fallout.

What is a personal guarantee?

A personal guarantee is a legal agreement where a company director agrees to personally repay a business debt if the company is unable to. In simple terms: if your business can’t pay, you promise that you will.

It isn’t about what your company owes. It's about what you could end up owing. That means your own bank account, your car, your property, or other personal assets could be at risk if things go wrong.

Lenders and suppliers often request personal guarantees when dealing with small or medium-sized businesses, particularly in situations such as:

• Secured or unsecured loans from banks or alternative lenders
• Invoice finance or asset-based lending facilities
• Business overdrafts or lines of credit
• Commercial property leases or tenancy agreements

Lenders typically require them to reduce their risk, especially when dealing with younger or higher-risk businesses where credit history is limited or assets are thin on the ground. In signing one, you become the lender’s safety net. And while that might be necessary to secure funding or space for growth, it’s a decision that shouldn’t be taken lightly.

Key responsibilities and legal obligations

When it comes to personal guarantees, formality matters; personal guarantees must be in writing, signed and dated by the guarantor. They may be presented as standalone documents or buried within wider loan or lease agreements, but either way, your signature locks you in.

The scope of the guarantee can vary significantly. Some are limited, meaning your liability is capped at a specific figure. Others are unlimited, leaving you liable for everything, including the full balance, interest, and even recovery costs. That’s why awareness of which type you’re signing is crucial.

And here’s a point that catches many directors out: your liability doesn’t always end when your role does. Unless the lender gives you a written release, the personal guarantee often stays enforceable, even if you leave the company. Resigning as a director doesn’t make it disappear.

If you’re not the only one signing, that can add another layer of complexity and risk:

Joint and several liability

If more than one director signs the same guarantee, most lenders include a joint and several liability clause. That means:

• Each director is individually responsible for the full amount owed, not just their share.
• The lender can legally chase any one of you for 100% of the debt.
• There’s no requirement to split the liability or pursue all signatories equally.

In other words, if your co-director vanishes or declares bankruptcy, you could still be left footing the entire bill.

Lender enforcement rights

Many assume a lender must first try to recover from the business before coming after the individual. However, that’s not usually the case. Most agreements allow the lender to pursue your personal assets straight away, or at the very least, in parallel with corporate recovery efforts.

Risk to directors

The moment a personal guarantee is signed, the financial risk shifts from the business to you, with everything you've worked hard to build at stake. Some common assets at risk include:

• Your family home, even if it’s jointly owned.
• Savings, pensions and investments
• Vehicles, personal valuables and other assets unrelated to the business

The damage doesn’t stop at what can be sold to settle the debt. If repayment is missed or defaulted on, your credit score will likely take a hit, making future borrowing more difficult or expensive.

In more serious cases, directors can face bankruptcy proceedings, particularly where the debts are large or the guarantor has no way to repay them. The reputational damage can also follow you, especially if you’re involved in other ventures or plan to start again.

So why are personal guarantees still often signed without hesitation?

• Lenders don’t always spell out the risks clearly
• Many directors believe failure is unlikely or temporary
• There’s an assumption that a limited company will shield them

Common misunderstandings and pitfalls

Most of the most damaging consequences of personal guarantees come down to simple misunderstandings. For instance, thinking the guarantee ends when you resign or sell shares, or relying on informal verbal agreements that were never put into writing.

Most personal guarantees have no expiry dates unless one is clearly stated. They remain enforceable indefinitely, even if the facility they support has been partially paid, or even if your involvement with the business ends entirely.

The problem is, personal guarantees can feel like background admin, brushed over during a funding or leasing negotiation. But misunderstanding the terms, or assuming you can revisit the details later, can leave you open to financial loss.

Before signing anything, directors should take the time to read the small print and seek independent legal advice, asking questions until everything is clear.

What can directors do to protect themselves?

If you're asked to sign a personal guarantee, there are steps you can take to reduce the personal risk involved. Start by looking at ways to limit your exposure:

• Negotiate a cap – Request a limited guarantee that clearly states the maximum amount you could be liable for.
• Ask for time-bound or conditional clauses – These might limit the duration of the guarantee or tie it to specific circumstances or milestones.
• Review the full agreement – Guarantees are often hidden within wider contracts, so it’s important to check how all the terms work together.

Another increasingly popular safety measure is personal guarantee insurance (PGI)

This is a specialist policy designed to cushion the financial impact if a guarantee is called in. Should your business fail, PGI can cover a significant portion of the debt, giving you a crucial layer of protection for your assets.

At Purbeck, we offer FCA-regulated PGI products designed specifically for UK company directors. It’s a proactive risk management tool now being used by directors, lenders and business advisers.

However, it’s important to be clear: PGI doesn’t cancel out a personal guarantee. You’re still liable, but the policy provides a financial buffer when you need it most.

Your safety net when it matters most

At Purbeck, we understand how much responsibility sits on a director’s shoulders. Signing a personal guarantee can feel like the only way forward, but it shouldn’t mean putting everything you’ve built at risk.

As the UK’s leading provider, our FCA-regulated policies are designed with you in mind, covering up to 80% of the guaranteed amount if things don’t go to plan.

If you're considering a personal guarantee or are already tied into one, we're here to help. To learn more about our cover options, don't hesitate to get in touch with a member of our team today.