Your business is doing well - not only are you planning to open a second location, but you're also looking into expanding your product range and taking on a few new hires. It's the kind of progress you've worked hard for. However, to get there, you need funding. And with the loan agreement comes a personal guarantee.
Before you sign, you pause because while funding feels like the ticket to achieving this growth, signing the guarantee means putting your personal assets at risk. Your home, your savings and your family's financial security.
It can feel like a frustrating trade: take the next step forward but carry a personal financial risk to do so. It’s a scenario many business owners and directors know all too well, and it’s exactly why personal guarantee insurance (PGI) exists.
In this guide, we’ll explain exactly what PGI is, how it works and how it can give you confidence to grow your business without putting everything else at stake.
What is a personal guarantee?
A personal guarantee is a legal commitment that makes you personally responsible for a business loan if your business can't meet its financial obligations.
It’s an agreement that lenders often require when a business applies for funding, especially smaller businesses or limited companies without a substantial trading history or significant assets. By signing it, you're effectively saying, 'If the business can't pay, I will'.
This means that if your business defaults on the loan, the lender can pursue your personal finances to recover the debt. That could include savings, investments, or even your home, depending on the terms of your guarantee.
What is personal guarantee insurance (PGI)
Personal guarantee insurance (PGI) is a specialist insurance policy designed to offer some protection against this risk to your personal finances.
In the event that your business is unable to meet its loan repayments and the guarantee is called in, PGI can cover a portion of the outstanding liability, which helps to limit the financial impact on you personally.
How does PGI work?
The level of coverage PGI offers depends on various factors:
- Whether the loan is new or existing at the time of taking out the policy.
- Whether you're the sole guarantor or sharing the responsibility.
- How much of the loan is unpaid.
It’s important to note that PGI doesn’t cover every type of personal debt. It’s specifically for personal guarantees linked to unsecured business loans and commercial finance agreements.
The amount covered depends on the policy and typically includes set limits and conditions, so it's essential to understand exactly what’s included before you commit.
What does PGI cover?
Business can be unpredictable. Even with the best intentions and a solid strategy, circumstances beyond your control, from a key client pulling out or supply chain issues to rising costs, can quickly put pressure on cash flow.
If your business becomes insolvent or goes into liquidation, the lender can step in to enforce the personal guarantee. PGI typically covers a percentage of the amount you're personally liable for, helping to soften the financial impact.
While PGI doesn’t replace full commercial loan protection and can’t protect your business itself, it does provide a safety net for directors, offering support when it's needed most.
Who should consider PGI?
If you’re signing a personal guarantee for a business loan, PGI is well worth considering.
PGI is particularly valuable for:
- Business owners applying for a growth loan whether that’s to open a new location, launch a new product line or expand their team.
- Company directors securing asset finance for vehicles, machinery, or equipment needed to scale.
- Entrepreneurs using invoice finance to improve cash flow and keep the business moving.
- Anyone worried about the impact on their personal finances, whether that’s protecting your savings or home.
It's especially relevant in our current economic climate when even well-run businesses can face unexpected challenges. PGI ensures that a setback in your company doesn't turn into a financial crisis.
What are the benefits of PGI?
Taking out PGI can offer a range of benefits for directors and business owners, including:
- Personal financial protection: It helps shield your savings, property, and other assets if the business can’t repay its debt.
- Peace of mind when borrowing: It allows you to move forward with confidence, knowing you're not bearing the risk alone.
- Encouragement for responsible lending: It offers reassurance to both borrowers and lenders by introducing an extra layer of accountability.
- Support for scaling and funding business growth: It enables you to take on essential funding for expansion without putting everything at stake.
- Confidence in your decision: It reduces the hesitation often tied to signing personal guarantees, making it easier to make key decisions.
Why choose Purbeck for PGI
When you’re signing a personal guarantee, it’s essential to know you’re protected by a provider that understands the risks and how to manage them.
Purbeck are the UK's original and leading specialists in PGI. Our policies are tailored to suit your unique loan and business circumstances, with flexible options to suit the structure of your financial agreement.
We collaborate with a trusted network of brokers and financial advisers across the UK, ensuring you have access to experts who understand your business goals.
If you’re looking for experienced guidance and bespoke protection, we’re here to help. For more information, don’t hesitate to get in touch with our expert team.
