What is a personal guarantee - and do you need one?

What is a personal guarantee - and do you need one? image

If you’re a company director in the UK looking for a cash injection to help you grow your business, you’re not alone. According to Finder, 27% of SMEs taking part in the British Business Bank survey 2018 reported being financed by loans.

And it’s not hard to understand why businesses are seeking loans to help them grow.

It costs an average of £12,601 to start a business in the UK - that’s a lot of money to start a business in the first place. Even if you have £12,601 to start the business, what about the expense of running the business? Late invoicing and cash flow issues are the downfall of many UK businesses - so it’s not surprising that many are researching the finance options available to them. If it could help you grow - why wouldn’t you?

If money worries are keeping you up at night and you’re one of the many directors without business collateral to secure against a loan, don’t worry - this is where a personal guarantee can come into its own. Signing a personal guarantee can help you secure an unsecured business loan. For many small businesses, a personal guarantee is the only way to access new finances.

If you’re not considering finance yet financial expert, Rohit Arora, urges businesses to look into credit options before they think they even require it. Preemptively researching financing options can mean your business gets better rates on funding options when their business is performing well.

Looking into finance options early on can also mean you’re prepared should anything happen with your business. The Scout Motto ‘be prepared’ is the motto always to refer back to where a business is concerned!

Read on for more about what a personal guarantee is, its pros and cons and the difference between an unlimited and limited personal guarantee.

business women with laptop

What is a personal guarantee?

Securing finance for your business can be daunting - there are many financing options, and if you’re hoping to pursue an unsecured business loan for your company - you might need to sign a personal guarantee.

A personal guarantee is just that - it’s personal. It’s a signal to lenders that you believe in your business so much that you’re willing to become the secondary payer if the company fails to pay its loan repayments.

It sounds scary, but it’s a viable option for you if your business case alone isn’t strong enough to secure a loan or you want to loan more money - it's also a good option if your business is new and therefore has nothing to showcase to lenders.

Will your business require a personal guarantee?

Depending on your business type and your position within the business, you may or may not be required to sign a personal guarantee.

Are you a limited company or an LLP?

If your business is a limited liability partnership (LLP), many lenders will expect you to provide a personal guarantee. Any stakeholders and directors with a minimum of 20% - 25% stake in the limited business may be expected to give a personal guarantee.

Are you a sole trader or a partnership?

Business owners who are classed as sole traders or partnerships with unlimited liability will invariably be personally liable. The funding will be based on the personal credit history of the business owner.

Unlimited and limited personal guarantees - what’s the difference?

There are two different types of personal guarantee - unlimited and limited. Simply put, not every lender will be after you for the full loan amount - some lenders will want a capped proportion. To assess your suitability, the lender will look at your net worth - taking credit history and assets into consideration.

So what’s the difference between the two?

If your business goes under or defaults on its loan repayments - an unlimited personal guarantee enables the lender to pursue you for the full amount of the loan. You will also be responsible for paying interest and legal fees. If you don’t have the money, they can go after your pension and your savings. If you don’t have enough cash in there - this is when your home and other assets like cars are taken toward the repayment.

A limited personal guarantee is where the lender can only take a set amount from you. If you’ve got multiple partners in your business, this means everyone can be held responsible for loan repayments - with each of the partners owing a set personal amount if the company goes under or defaults.

The pros and cons of a personal guarantee

Here’s a quick round-up of the pros and cons of signing a personal guarantee.

Pros

  • Lend a higher amount of money
  • Chance to expand your business
  • A good option for new businesses
  • Decreases risk and increases security for the lender

Cons

  • Personal repercussions - you could lose your house, your car and other personal assets
  • If your assets fail to cover the loan repayments - you could be made bankrupt
  • If you can’t pay the loan back, you will have to seek court permission to become a company director in the future

How to reduce the risk when signing a personal guarantee

As with any business decision, you must take the time to understand the risks involved when considering a personal guarantee.

Talk to a financial expert

If you have an accountant, we’d suggest discussing your plans with them and talking through the risks. Even if your accountant mainly acts as a sounding board, you must explore your financial options with someone in this profession - even if it’s just to clarify you’re making the right decision for you and your business.

An accountant can offer you expert financial advice and advise you on options you hadn’t realised existed.

Don’t have anyone to talk to? You can speak with our specialist funders today about your options.

Split responsibility

You can also reduce the risks by not being the sole director responsible for the debt. Splitting the guarantee with your other directors, if you have multiple, is a great way to minimise the risk.

Understand what is expected of you

Seeking clarity in your personal guarantee can help you minimise risk. Does signing a personal guarantee apply to the current loan you are seeking, or does it apply to all future business loans? Understanding all the specifics is crucial, and signing a personal guarantee should not be something you take lightly.

Consider personal guarantee insurance

Knowing your assets are on the line if the business loan repayments default is a worrying prospect. Taking out insurance can cover up to 80% of the loan total and give you peace of mind that your assets won’t be touched.

Should you sign a personal guarantee?

As with any burgeoning business decision, it comes down to a few things.

You need to do your research - do you understand precisely what is expected of you if your business fails to make the necessary loan repayments? What does it mean for your personal life as you know it?

When making this decision, it’s essential to keep in mind what could happen if the business defaults on payments, of course, but imagine for a moment that the business thrives and grows because of the injection of cash. It would help if you considered whether the potential positives could outweigh the negatives.

There are always negatives to consider when looking to secure any finance, and it’s essential to be mindful of them - but there are also some fantastic opportunities that money can present businesses with. Sometimes growth requires a cash injection - so you need to question whether you’re willing to take that chance and sign a personal guarantee.

If you’re not sure about the financing options available to your business, speak with one of our specialist funders today.

Does your business qualify for an unsecured business loan?

To qualify for an unsecured business loan in the UK, your business should have been operating for at least four months and have an annual turnover of £10,000 minimum. You should also have a UK bank account and can be either a limited company, limited liability partnership (LLP) or a sole trader registered in the UK.

Here at Capalona, our friendly specialist funders are committed to finding you a quick and tailored financing solution for your business - we want to help you grow. We’ve helped businesses just like yours get the funding they need - whether you’re a start-up or an established business - we can help you!