At Purbeck, we understand that signing a personal guarantee is a huge commitment.
This article is for business owners who want to gain a better understanding of personal guarantees, including how it affects them and their businesses.
What is a personal guarantee?
A personal guarantee is a legally binding agreement between a business owner or director and a lender. It states that whoever has signed is responsible to repay any credit, typically a loan, that has been issued to their business.
This means that if at any point the business cannot afford to make the repayments, then the person who signed the personal guarantee is responsible for the debt. This presents a significant risk to their personal assets if there are any outstanding debts.
Personal guarantees are used as added security for lenders, especially when issuing loans to SMEs and start-ups who need to fund their businesses growth, but who may not have any other collateral.
What are the business benefits of a personal guarantee?
There are many business benefits to signing a personal guarantee, including:
- Helps to fund your new business
Lenders are often reluctant to risk funding SMEs who may have low credit scores and have a higher risk of insolvency.
However, a personal guarantee significantly reduces this risk to the lender, meaning that they are willing to issue credit to both established and budding enterprises.
- Larger loans and lower interest rates
Again, due to mitigated risk, lenders will often offer businesses that have signed personal guarantees larger loans as well as lower interest rates, meaning that repayments and overall costs will be significantly lower.
- Better loan offers
Being willing to sign a personal guarantee means that there will be more loan options available to you and you’ll have the opportunity to shop around for the best on the market.
- Improves chances of securing a loan
The uncertainty of the UK economy in recent years has led to all businesses facing difficulty when attempting to source funding from lenders who don’t want to take on excessive risk.
There are many reasons why a business may need to secure a loan, and it’s not limited to SMEs who need external funding. Whether you need to invest in equipment or property, a personal guarantee can help improve your chances of securing the loan you need to give your business a boost.
How do personal guarantees affect you as a business owner?
The benefit of a personal guarantee as a business owner is that it gives you access to external funding that you wouldn’t have had previously, enabling you to invest in your business and giving it a better chance of success.
However, it does present a distinct personal risk. If your business is unable to repay the loan following insolvency, the personal assets you have used as your guarantee will be at risk to cover the outstanding debts.
This means that you could lose your home, your savings, your vehicles or whatever has been used to secure the loan.
Another negative impact of personal guarantees for a business owner is that if you are forced to declare bankruptcy due to the fact that you cannot pay off the outstanding debt, it can have long-term consequences, such as being unable to hold the position of business director in the future.
The best way to protect yourself in the event of insolvency is to take out Personal Guarantee Insurance.
Personal Guarantee Insurance from Purbeck
At Purbeck, we understand the risk that business owners are putting themselves under for the sake of their business’ future.
That’s why we designed our unique personal guarantee insurance policy to give you the confidence and security to secure external funding without risk.
No one wants to think about their business suffering from insolvency, but it’s better to protect yourself than wish you had further down the line.
If you have any further questions about our policies, or would like to protect your assets and gain the peace of mind needed to grow your business in the right way, don’t hesitate to get in touch with a member of our team today.
